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Downgrade brings no shock waves

RATINGS downgrades often come in pairs, Slovakia learned recently. Only one month after international credit rating agency Standard & Poor’s downgraded the country’s long-term sovereign debt rating in January 2012, its counterpart Moody’s on February 13 also knocked Slovakia’s rating down one notch from A1 to A2, while changing its outlook from stable to negative. Slovakia was among six eurozone members whose sovereign credit ratings were lowered. Three more countries, Great Britain, France and Austria, had their ratings outlooks changed to negative over what the agency described as a deterioration of the debt crisis and increased macro-economic risks.

Finance Minister Ivan Mikloš(Source: TASR)

RATINGS downgrades often come in pairs, Slovakia learned recently. Only one month after international credit rating agency Standard & Poor’s downgraded the country’s long-term sovereign debt rating in January 2012, its counterpart Moody’s on February 13 also knocked Slovakia’s rating down one notch from A1 to A2, while changing its outlook from stable to negative. Slovakia was among six eurozone members whose sovereign credit ratings were lowered. Three more countries, Great Britain, France and Austria, had their ratings outlooks changed to negative over what the agency described as a deterioration of the debt crisis and increased macro-economic risks.

Nevertheless, market watchers were quick to explain that no shockwaves are likely on the heels of the downgrades since the markets had anticipated them and made plans accordingly even before the rating agencies released their new grades.

Slovak Finance Minister Ivan Mikloš also said that the lowering of Slovakia’s rating would probably not significantly affect trading in the country’s bonds. Along with Slovakia’s position as a small and open economy which is largely dependent on trade with the eurozone, Mikloš said that political risks associated with the fall of the Slovak government had also contributed to the reduction.
UniCredit Bank analyst Dávid Dereník said that the financial markets responded only briefly to Moody’s decision and that the downgrade merely paralleled a similar move by its rival Standard & Poor’s last month.

“The markets already have the lower ratings to a large degree included in their risk margins and short moves on the markets after the downgrades were announced are rather the results of short-term speculations,” Dereník said.

According to Dereník, rating agencies today announce lower rating only after investors have already assessed the country with their own risk margins.

Soňa Muzikářová, an analyst with the Slovenská Sporiteľňa bank, said that Moody’s had signalled that it would revise the ratings of European countries as early as November 2011, while in December confirming Slovakia’s rating at the level of A1 with a stable outlook, citing Slovakia as an attractive destination for foreign investment. Nevertheless the agency had warned in the autumn, according to Muzikářová, that Slovakia’s public debt was growing too fast and that the European debt crisis could have a negative impact on its credit assessment.

“Even if international ratings under certain conditions provide important guidance for strategic decisions by investors, they still represent only one of several factors which investors have at their disposal,” Muzikářová noted in a memo. “Other important factors include investment goals and total investment portfolio.”

Poštová Banka analyst Eva Sadovská told the SITA newswire that she believes the lower rating could affect the yields which creditors demand from Slovakia to lend it money. However, she admitted that the country is already paying a certain risk surcharge.

However, Kamil Boros of X-Trade Brokers said that the media are now more interested in ratings than investors themselves, since the latter react earlier to certain risks than rating agencies. He added that he does not expect Moody’s decision to have any significant impact on Slovak bond revenues, TASR reported.

The large volume of money poured into Europe’s banking system by the European Central Bank in December helped the sovereign debt auctions held on February 14, in which demand was up compared to January, Dereník said, noting that Italy had sold 3-year and 5-year bonds worth €6 billion. He suggested that the successful auctions thus erased the earlier increase in the risk surcharges of countries whose ratings were trimmed.

Potential pitfalls

Along with uncertainty over the prospects for institutional reform in the eurozone and the weak macroeconomic outlook across the region, the increased susceptibility to financial and political event risk, which presents considerable challenges to achieving the government’s fiscal consolidation targets and attempts to reverse the adverse trend in debt dynamics, contributed to Moody’s move.

“Slovakia’s rating was reduced mainly due to the trade and industrial dependence of Slovakia on the eurozone, where the agency sees higher risks in association with the prevailing debt crisis,” said Dereník.

Nevertheless he admitted that this year’s state budget, which could have been interpreted as putting political over economic imperatives following the fall of the government, could have had an impact as well.

“The markets are thus marching somewhere between their year-end pessimism and future euphoria,” said Dereník.

Muzikářová suggested that Moody’s will consider re-evaluating Slovakia’s rating in the event that investor sentiment in the eurozone improves or the public debt situation stabilises. Slovakia could regain its rating on condition of structural reforms, fiscal consolidation, or if the country’s economic growth restarts, Muzikářová suggested.

On January 13, Standard & Poor’s downgraded the long-term rating for nine European countries, including Slovakia. Slovakia’s rating fell one notch, from A+ to A, but unlike the other eight its future outlook was ranked as ‘stable’ rather than ‘negative’, meaning that a further credit downgrade in the near future is judged to be less likely.

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