On March 30, Moody's Investors Service downgraded Slovakia's country ceiling for foreign currency bonds and notes to Ba1/NP and its ceiling for foreign currency bank deposits to Ba2, infuriating the Finance Ministry and adding yet another weapon to the opposition's propaganda arsenal.
The 'NP' in Slovakia's new rating stands for "Not Prime", which means that the country has been dropped from the 'first division' of investment rated countries (Slovakia was assigned a Baa3 rating in March 1995, which is the lowest possible investment rating) and relegated to the 'second division' of non-investment rated countries, albeit with the highest possible non-investment designation.
Consequently, all Baa3-rated bonds of the National Bank of Slovakia (NBS) have been downgraded to Ba1, as well as the bonds issued by dam-builder Vodohospodárska výstavba, which are guaranteed by the government. At the same time, Moody's adopted a separate decision concerning the ratings of three commercial banks (see Corporate news, page 6).
"The downgrade is based upon the consistently high fiscal and current account deficits of the Slovak Republic, which have been increasingly financed by foreign, especially short-term borrowing," Moody's statement reads.
"The high interest rates in the economy, set in place to support the exchange rate regime and limit liquidity in the face of expanding household consumption, are increasing the burden of servicing domestic debt and forcing Slovak firms and banks to finance their operations and investment needs abroad," Moody's continued, citing high levels of public spending and attempts to curb NBS's independence as other important reasons for the downgrade.
Crown falls, but NBS calm
The next day, the Slovak crown fell sharply against its mark/dollar basket in a nervous morning's trading. "Both foreign and local banks were buying hard currencies but the volume was not very significant," said one foreign bank dealer who requested anonymity. "[But] this market is a central bank driven market and the fixing can move the crown either way."
At 6.40 a.m., the crown was quoted at 35.690/740 to the dollar and at 19.279/319 to the mark, 3.0 percent below the basket parity, after opening at minus 2.6 percent and closing at minus 1.7 percent a day before. However, at 9.10 the crown bounced slightly back at 35.400/450 to the dollar and at 19.160/200 to the mark, or 2.3 percent below parity.
NBS Vice-Governor Marián Jusko said on the same day that the NBS did not see any need for extraordinary measures. "We have the impression that the situation is now stabilising," Jusko said. "We had a short meeting with the central bank governor this morning and the general unambiguous conclusion was that we won't make any changes to monetary policy."
But while peace reigned at NBS headquarters, indignation erupted at the Finance Ministry. "The Finance Ministry's position is that while downgrading Slovakia's rating, Moody's Investors Service ignored Slovakia's positive fiscal development before March 1998," read a ministry statement released the next day. "The ministry received the information about [the downgrade] with surprise, because not so long ago this agency publicly stated that it was in the middle of putting together a study on Slovakia's fiscal and monetary policies."
But Dušan Meszároš, an analyst with ING Barings, disputed the Finance Ministry's logic. "[Moody's] took three months to review the situation and the result was a downgrade," he said, adding that a country's rating always represented a complex view from a creditors' standpoint, and was represented a long-term judgement that was unlikely to be repealed soon. "They try to be as forward-looking as possible, they like to have their ratings stable for up to five years. So we are likely to see [the new] rating in effect for a long time."
Nor was the opposition long in reacting to the move. "The more nonsense this government spreads, the more visibly it shows what terrible shape it has put the Slovak economy into," said Mikuláš Dzurinda, the opposition SDK leader. "The Moody's verdict proves that the current government has started to roll Slovakia on a downhill slope also economically, not only politically."
Standard & Poor's may follow
Noting that the downgrade was simply a statement of foreign creditworthiness, Meszároš continued that it shouldn't have any impact on GDP growth or domestic interest rates. "While macroeconomic performance may affect rating decisions, the reverse phenomenon does not occur," he said, while conceding that the downgrade "will have a negative effect on the future borrowing of Slovak entities [abroad]."
Peter Staněk, State Secretary at the Finance Ministry, agreed. "The rating downgrade will have a relatively substantial effect on loans that are being negotiated, especially for the telecommunications and energy sectors. Not that we wouldn't get any money, but that this money will be about one third more expensive," he said, adding that more expensive loans will also have to be repaid more quickly.
The situation may get even worse if others follow Moody's example. One day after the Moody's move, Standard & Poor's announced it was also in the mood to demote Slovakia from standard to poor. "We are increasingly worried about the [country's] credit," said Konrad Reuss, director of sovereign ratings. "We follow it very closely and we recognize that vulnerabilities have substantially increased."
S&P currently rates Slovakia's long-term currency credit at BBB minus, its lowest investment grade ranking. Reuss said S&P shared Moody's concerns about Slovakia's external liquidity position, but declined to say if and when S&P might revise its rating.
9. Apr 1998 at 0:00 | Daniel Borský