Poland’s plummeting political risk score foreshadows downgrade

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Poland’s sovereign bond spreads are in turmoil, after a shock downgrade by Standard & Poor’s (S&P). The move follows a sharp drop in its political risk score in the latest Euromoney Country Risk (ECR) survey.

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In the year-end survey, Poland’s political risk score dropped to 20.06 – the lowest it has been since ECR launched an updated methodology in 2011. Poland’s political risk score has been declining – indicating increased risk – since 2011.

Source: ECR

The drop in Poland’s political score from 20.17 in September to 20.06 in December combined with a fall in its economic risk score from 19.38 to 19.27 over the same period, contributing to a decline in its overall score to 65.62 from 66.93.

Poland, which enjoyed a ranking as the 29th safest country in the world in September, dropped four spots in rankings since the year-end survey.

S&P mainly cites political risk as its reason for downgrading the sovereign’s foreign currency credit rating to BBB+ from A- on January 15.

"Since winning the election in October 2015, Poland’s new government has initiated various legislative measures that we consider weaken the independence and effectiveness of key institutions, as reflected in our institutional assessment," states S&P.

The outlook on Poland’s rating is negative. Moody’s rates Poland A2 (stable) and Fitch A-.

S&P expressed concern about proposed measures from Poland’s new government, including "a law regarding the composition and voting requirements of the constitutional court that, in our view, will likely impede the court’s role as an effective check and balance".

Poland’s five-year credit default swap (CDS) spreads ballooned to their highest levels in 12 months after the downgrade. The five-year CDS hit 94 basis points at close of play on Monday – the first working day after the downgrade – before tipping north of 100bp later in the week.

 Source: Markit

"The decision of the rating agency Standard and Poor’s about lowering the credit rating of Poland is incomprehensible from an economic and financial analysis point of view," states the Polish Ministry of Finance after S&P’s announcement.

"This decision is contradictory to assessments presented by other rating agencies, the biggest international financial institutions and financial market participants." 

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.