WRAPUP 1-Debt crisis looms for Pakistan after rating downgrade
ISLAMABAD, Oct 6 (Reuters) - The risk that Pakistan could become the bankrupt state it was before a military coup nine years ago loomed larger on Monday as the rupee struck an all-time low and its debt was relegated deeper into junk bond territory.
The six-month-old civilian government led by President Asif Ali Zardari is engulfed with crises left behind by former army chief General Pervez Musharraf, who resigned as president in August.
On Monday, amid gloom over an economic morass and a security threat posed by Islamist militants after Islamabad's Marriott Hotel was blown up last month, the rupee hit 78.65 per dollar. That took its loss since the start of the year to more than 21 percent.
The central bank has just enough foreign currency to cover two months of imports, and a potential default on a sovereign loan is looming in February.
The fiscal and current account deficits are unsustainable. Inflation is over 25 percent and rising.
Rating agency S&P cut the rating on the country's sovereign debt rating to CCC-plus, a few notches above default level.
S&P said Pakistan's worsening external liquidity may imperil its ability to meet about $3 billion in upcoming debt payments.
"The Pakistani authorities now need to demonstrate that the financing gap in the balance of payments is capable of being bridged," said Tim Condon, economist at ING Bank in Singapore.
Analysts say Pakistan's best hope lies in the goodwill of multilateral lenders and friendly governments, like the United States and Saudi Arabia, keen to see the six-month-old civilian government succeed and stop a nation on the front line of the global war on terrorism sliding into chaos.
"That's their only lifesaver. The rest is a mess," said a Singapore-based fixed income fund manager from a major U.S. asset management firm, who asked not to be named.
The Asian Development Bank finally came through with a $500 million loan last week, but much more was needed.
An adviser to Prime Minister Yousaf Raza Gilani said last week that $3-4 billion was needed fast to stabilise the economy.
Pakistan's foreign reserves fell $690 million to $8.13 billion in the week that ended on Sept. 27. The State Bank of Pakistan said its own reserves fell to $4.68 billion, representing a little over two months of import cover.
LIQUIDITY CRUNCH
The constant pressure to pay import bills and meet debt payments has drained liquidity, and forced the government to borrow more from the central bank. Continued...
