January 15, 2016 / 5:31 PM / 2 years ago

UPDATE 3-S&P shocks Poland with credit rating downgrade

* S&P cuts rating to BBB+ from A-, outlook negative

* Says new government weakened independence of institutions

* S&P says may cut rating further in next two years

* Zloty immediately falls 1.5 pct to 4-year low vs euro

* Ruling party MP chides “usury-banking lobby” for downgrade (Adds finance ministry reaction)

By Marcin Goettig

WARSAW, Jan 15 (Reuters) - Standard and Poor’s (S&P) unexpectedly cut Poland’s credit rating a notch on Friday, saying the new government has weakened the independence of key institutions and the rating could fall further.

The cut, the agency’s first for Poland’s hard currency debt, deals a major blow to the nationalist-minded government of the Law and Justice (PiS) party, which won an election in October promising more welfare and widely-shared prosperity.

Poland, which joined the European Union in 2004, has gained a reputation as an exemplar of post-communist transformation in Europe, registering the highest economic growth in the bloc over the last decade as it attracted billions of dollars in foreign direct investment.

But any rise in funding costs for central and eastern Europe’s largest economy could now put pressure on the government’s budget, already strained by promises of additional spending.

S&P said it cut Poland’s foreign currency rating to BBB+ with a negative outlook from A-. The A- rating had a positive outlook.

The rating remains well within investment grade, but the agency said it could cut further in the next two years if the credibility of monetary policy is undermined.

The cut immediately sent the zloty currency to a 4-year low versus the euro.

“We expect a major Polish government bond sell-off next week,” said Rafal Benecki, chief economist at ING Bank Slaski, predicting the zloty currency would weaken too.

“The downgrade reflects our view that Poland’s system of institutional checks and balances has been eroded significantly,” S&P primary credit analyst for Poland, Felix Winnekens, said in a statement, criticising legislative changes to the constitutional court and public broadcasting under the new government.

Earlier this week, the European Union began an unprecedented inquiry into whether Poland has breached the bloc’s democratic standards by passing the new laws.

The Polish finance ministry said the rating downgrade was “incomprehensible” in economic and financial terms.

Fitch ratings agency confirmed its Polish A- rating on Friday with a stable outlook. Moody’s rates Poland at A2 with a stable outlook, one notch above Fitch.

But S&P said: “A law that moves the power to appoint the management ... of public broadcasters to the Treasury ... significantly weakens the independence of these institutions and has the potential to make them political instruments.”

“USURY-BANKING LOBBY”

A PiS member of parliament and member of the lower chamber public finance committee, Janusz Szewczak, called the rating cut “a revenge of the usury-banking lobby.”

Government spokesman Rafal Bochenek said there were no economic grounds for the downgrade. “Nothing has changed in the economy and Poland is not experiencing any turbulence,” he said.

S&P has held Poland’s rating at A- since 2007. It increased the outlook to positive last year based on Poland’s declining deficits under the previous government and uninterrupted economic growth over the last two decades.

Even after the cut, Poland’s S&P rating remains three notches above ‘junk’ level. The agency cut Hungary’s credit rating to junk in 2011, saying the policies of Prime Minister Victor Orban were unpredictable.

PiS party representatives have long praised the policies of Orban, who was also accused by critics of undermining democratic checks and balances by advocating “illiberal democracy”.

Hungary’s rating remains in ‘junk’ despite an upgrade last year.

The Polish rating cut shocked economists who had put the odds of a simple cut in the outlook for the rating at 30 percent in a Reuters poll on Thursday. None of the 17 economists polled even mentioned a possibility of a cut in the rating itself.

“The message to other sovereigns out there is very clear: don’t touch the constitutional framework that has been built up over so many years, or else a downgrade and a subsequent increase in funding costs will ensue,” Simon Quijano-Evans, strategist at Commerzbank said. (Additional reporting by Agnieszka Barteczko, Anna Wodarczak-Semczuk and Wiktor Szary; Editing by Toby Chopra/Ruh Pitchford)

Our Standards:The Thomson Reuters Trust Principles.
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