TEXT-S&P may cut Paraguay's 'BB-/B' sovereign credit ratings

Mon Jun 25, 2012 3:38pm EDT

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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