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