Polish Bond Investors Ready This Time as Moody's Decision Looms

  • JPMorgan cuts Polish holdings before rating review Friday
  • Investors need to `live on moon' not to be prepared: Insight

Investors in Polish bonds are making sure they won’t be blindsided by another credit downgrade.

JPMorgan Chase & Co. reduced its holdings in the nation’s debt in anticipation that Moody’s Investors Service will follow S&P Global Ratings by lowering the sovereign in a ratings review due on Friday. A second cut to Poland’s investment-grade score is so well-flagged that investors would have to "live on the moon" not to be ready, according to Insight Investment Management Ltd.

“The market has turned a bit more cautious,” said Pierre-Yves Bareau, who oversees $39 billion as the head of emerging-market debt at JPMorgan’s asset-management unit. “The currency has been weak as well, therefore at this moment Moody’s may be already in the price.”

Polish debt has underperformed peers in emerging Europe since S&P shocked markets in mid-January with a one-level downgrade that forced traders to reassess their perception of the nation as a haven in the developing world. Steps by the Law & Justice-led government to consolidate power and overhaul the nation’s top court since it taking power late last year have been behind the bearishness. Moody’s warned last month that heightening political risks in the country were "credit negative."

The zloty climbed 0.4 percent against the euro on Monday after Deputy Prime Minister Mateusz Morawiecki said the government hasn’t received any signals Moody’s will cut the rating. The currency tumbled 1.4 percent last week as Finance Minister Pawel Szalamacha asked the country’s top court to refrain from making comments about its conflict with the government that could influence the decision.

The cost to protect A2-rated Polish debt against default climbed to 86 basis points last week, putting it in line with Latvia, scored one step lower by Moody’s. Contracts on Slovakian debt, which shares the same ranking as Poland, cost half as much. Both Slovakia and Latvia are members of the euro area.

S&P cut Poland’s debt grade one step to BBB+ with a negative outlook on Jan. 15, the third-lowest investment grade and two steps below Moody’s, citing concern over the independence of key institutions in its decision.

The move triggered the biggest slide in the zloty in four years. While the currency recovered most of its losses within a month, declines since the start of April have sent the zloty to within 2 percent of this year’s low reached on Jan. 20. Outgoing central bank Governor Marek Belka said last week that the slump may already have priced in a possible downgrade.

No Surprise

“A rating cut is possible, and it wouldn’t be as much of a surprise for markets as it was in January,” said Krzysztof Izdebski, who helps oversee the equivalent of $2.5 billion as a money manager at Warsaw-based Union Investment TFI SA. “Investors already demand higher premium.”

The yield on Poland’s 10-year bond was 3.05 percent on Tuesday, 19 basis points away from a January peak. While markets may be signaling a rating cut, Citigroup Inc. economists see only a 30 percent chance of that happening this week.

A more likely scenario is for Moody’s to keep Poland on hold and lower the outlook to negative from stable, Piotr Kalisz and Cezary Chrapek at Citigroup’s Polish unit in Warsaw said in a note May 5. How the government approaches a proposal to convert foreign-currency debt and the affect on the banking industry will be crucial to rating decisions, they said.

Constitutional Court

Law & Justice’s government has passed laws to tighten its grip on power, including rules making it more difficult for the constitutional court to overturn legislation. It’s also introduced a tax on bank assets to help finance increased social spending, while the president’s office has proposed a Hungarian-style conversion of Swiss-franc mortgages into the local currency to protect borrowers, a move that could cost banks as much as $17.3 billion, according to Poland’s financial regulator.

In its April comments, Moody’s said the constitutional crisis “may impair Poland’s attractiveness for foreign investors.” Ester Russom, a spokeswoman for the rating firm in London, declined to comment on the upcoming review when contacted by Bloomberg on Monday.

“Unless you live on the moon, you know that Poland will get a downgrade -- and that is what investors are preparing for,” said Rodica Glavan, who helps oversee $4 billion in emerging-market debt as a money manager at Insight Investment in London. “The ruling party continues to surprise negatively and investors may demand higher premiums for longer.”

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