Sunday, 17 January 2016

Triple Bee Plus, Outlook Negative

Friday evening. Negative news, as the one from August 2011 on US sovereign rating downgrade, are issued at the end of the working week after markets close, to let market participants “get over” the news and avoid turmoil when trading is resumed on Monday.

Standard and Poor's, one of three main rating agencies downgraded Poland’s sovereign rating from A+/stable to BBB-/negative. The move was par for the course; it was likely to happen, yet not now, but when effects of PiS government’s fiscal and (affected by them) monetary policies would impinge on creditworthiness of Poland. The most astounding aspect of the whole matter was not only the change in rating, but also the outlook. The blow was dealt without warning (i.e. changing rating outlook to negative while upholding the A- grade). On the same day Fitch upheld its A- grade, while Moody’s is bound to review the rating of Poland this year. The saddest aspect of the whole story is that we are witnessing the first downward move in the rating in the history of Poland (it was last upgraded in February 2007 when PiS was in power and upheld throughout eight-year rule of PO-PSL).

The justification (thank you Michael for sharing) of the rating chance indicates at sound macroeconomic foundations of the Polish economy and points at unsettling political moves which disrupt the system of checks and balances, i.e. calling into question independence or empowerment of institutions whose role is also to hinder reckless policies of the government. The impaired constitutional tribunal, paralysed by the new law, with 3 judges elected by the previous parliament and not sworn in, is, according to the recently binding law, not authorised to hand down rulings. Politicians of PiS have openly admitted support for monetary loosening was one of the criteria in choosing among candidates to Monetary Policy Council. Not a scenario creditors of Poland would wish on themselves.

Ministry of Finance in its press release dubbed the Standard and Poor's decision “incomprehensible” (worth reading, as the content of the release holds water, if you turn a blind eye on their command of English). PiS politicians and befriended economists argue rating agencies should focus on performance of economy only. In practice, every sensible lender, to the extent permitted by law, evaluates conduct of their borrower. If you lend money to a private individual you should assess not only their sources of income and spending needs, but also their lifestyle (in practice often prohibited by law), because paradoxically a poor granny who lives off a tiny pension, but dutifully repays her loan might be more creditworthy than a lad in this twenties who has no family and earns well, but leads a lavish lifestyle, goes on a bender every weekend and throws about money. If you lend money to an enterprise you should assess not only numbers in its financial statements, but also its corporate governance rules, strategy and its viability, management and its credibility.

Your opinion of Standard and Poor's assessment might be low. The rating agency has discredited itself many times, yet the grades it issues are respected around the world and affect perception of Poland’s credibility. You might agree with the downgrade or not, but higher yields on Polish bonds will be a fact, also the Polish currency might stay weaker for a while. At the end of the day the taxpayer will pay the bill. I bet on (blue) Monday the WIG20 index opens 3.8% down from Friday’s close (partly driven by dire trading in the US and falling prices of oil and copper) and closes 1.7% down from Friday’s close. I also expect a slight strengthening of PLN, though in mid-term it is likely to be under pressure of general negative sentiment around the world, except for impact of local policies.

You can also ask who pays Standard and Poor's. In general those are potential or existing holders of Polish debt, i.e. in practice financial institutions who (at least partly) rely on the rating agencies’ evaluation in their assessment of Polish bonds’ credit quality. Theoretically, Standard and Poor's should attempt to deliver the best service to their clients, because its role it to attempt to protect their interests as creditors of Poland. The truth might be different, as the example of worthless AAA+ ratings assigned to junk mortgage-backed CDOs best showed.

Finally, is it the revenge of “banksters” for introducing the financialinstitutions tax (president signed the law on Friday) or for the draft of currency mortgage law presented also on Friday? The exact timing is in my view coincidental, but indeed the downgrade might be a form of warning (get your hands off the financial sector) combined with punishment. But on the other hand, if you want to borrow money from somebody, you actually must agree on some conditions and constraints set by lenders and if they perceive you as more risky, your cost of debt will be higher. The principle is simple, if you want to mess with lenders, do not ask them for more money, but reduce your debts. PiS government wants to have a cake and eat it – they will need to borrow more (I do not believe the turnover tax, the financial institutions tax and improving VAT collection will be sufficient to fund 500plus programme, especially in the current macroeconomic environment), and simultaneously ask bankers in and tell them to kneel. I know many can’t wait to finally see bankers on their knees, but such sight is too beautiful to be true!

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