TEXT-S&P may cut Paraguay's 'BB-/B' sovereign credit ratings
Overview -- The impeachment of Fernando Lugo on June 22, 2012, has possible economic ramifications for Paraguay that could hurt the sovereign's creditworthiness. -- We are placing our rating on the Republic of Paraguay on CreditWatch Negative. -- We expect to resolve the CreditWatch within the next three months. Rating Action On June 25, 2012, Standard & Poor's Ratings Services put its 'BB-/B' sovereign credit rating on the Republic of Paraguay on CreditWatch Negative following the recent impeachment of President Fernando Lugo. Rationale The Lower House of Congress initiated the impeachment by a 76-1 majority in a session on June 22 lasting less than two hours. On June 23, the Senate approved the final impeachment of Fernando Lugo by a vote of 39-4. The impeachment trial was based on the "poor performance" of Lugo's administration after the worst single incident of political violence for decades on June 15, when six police officers and 11 civilians were killed in a police operation to clear landless protesters in the northern department of Canindeyu. The CreditWatch Negative reflects the rising credit risks due to the possible political and economic ramifications of the abrupt change in government, and the exit of key economic officials in the government--specifically Finance Minister Dionisio Borda and Jorge Corvalan, President of the Central Bank of Paraguay. These key figures were important pillars behind the country's greatly improved macroeconomic performance during the past decade. The abrupt change in political leadership and key economic positions raises uncertainty about the implementation of economic policies in a country with relatively weak public institutions. Furthermore, possible political instability through protests or violence could lead to a deterioration in economic prospects. In addition, Paraguay's main trading partners (Argentina and Brazil) have threatened economic sanctions that, if put in place, would damage economic prospects and lead to worsening fiscal and external indicators, which to date have been two of Paraguay's main supporting credit factors. However, in the short term, solid levels of foreign-exchange reserves and the government's low net debt levels (less than 10% of GDP) mitigate short-term problems in rolling over its debt. CreditWatch We expect to resolve the CreditWatch Negative within the next three months when the impact of the recent events on the country's domestic political environment, policy making, growth prospects, and external liquidity indicators become more clear. The impeachment will likely heighten political instability in the run-up to the April 2013 presidential elections. Furthermore, possible Mercosur sanctions could hit an economy already in recession as a result of the severe drought this year. Under this scenario, the new Franco government will face the difficult task of repairing damaged relations with its Latin American partners. Related Criteria And Research Sovereign Government Rating Methodology And Assumptions, June 30, 2011 Ratings List CreditWatch Action To From Paraguay (Republic of) Sovereign Credit Rating BB-/Watch Neg/B BB-/Stable/B
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