Market shrugs off ratings downgrade

Fixed-income investors largely ignored a ratings downgrade last week on Polish long-term local currency debt, but fixed-income traders said the effect might be more severe once offshore investors fully account for the change. Standard & Poor's (S&P) unexpectedly lo-wered its long-term local currency sovereign credit and senior unsecured debt ratings for Poland to single "A" from single "A" - plus, the first such move by the ratings agency for Poland. But even though the S&P has indicated that long-term prospects for złoty-denominated debt have worsened, investors didn't pay much attention to the recommendation. "To be honest, the market completely shrugged off the news," said Włodek Kado, a fixed-income trader at Bank Handlowy. But that's only part of the story. "The key point is how foreign funds will react in the future," he said. Traders said that for about two hours after S&P made its announcement, bond and currency markets traded below their averages. Since then, investors stabilized their positions.

Some foreign investors, however, might take longer to evaluate what S&P's downgrade means for their portfolios and Poland's future, traders said. After further review they might want to pare back on their Polish holdings, potentially worrisome for a country that still relies on foreign capital, said Paweł Kielek, a Warsaw-based fixed income trader at ABN Amro. Traders were unwilling to put a price tag on their potential losses. S&P explained the downgrade by saying that high fiscal deficits and growing government debt were a cause for concern. Warsaw-based traders were split over the validity and timing of the move. "The recent downgrade was pretty unexpected; it was bad timing," Kielek said. "Certain key economic indicators are much better than they were a year ago." Kielek explained that recent current account data, indicating a more favorable ba-lance of trade, and inflation are at much safer levels than they were last year, which led him to question why S&P chose last week to reach a decision. "The timing is improper," he added. Other traders said S&P's timing had only a small initial effect on the currency and bonds, which are both trading at similar levels to before the downgrade. "A lot of aggressive funds sold (Polish exposure) after (former Finance Minister Marek) Belka resigned," Kado said, noting that actions such as downgrades had already been factored into the economy.