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Polish Bonds Fall as Moody’s Report Underscores Downgrade Threat

Polish bonds

Polish bonds fell, sending yields on five-year notes up the most in two weeks, as Moody’s Investors Service said wrangling over changes to its Constitutional Court is “credit negative.”

The yield on the government bond due in April 2021 rose four basis points to 2.20 percent. While implications for the changes to the court’s independence remain unclear, the constitutional crisis and rise of political domestic risk may hurt Poland’s creditworthiness and appeal for foreign investors, Moody’s Assistant Vice President Marco Zaninelli wrote in a report issued today.

Moody’s, which has kept its fifth-lowest investment grade rating of A2 with a stable outlook on the country of 38 million people since 2006, is poised to issue a new review on May 13. The zloty fell the most in four years after Standard & Poor’s in January handed Poland its first credit-rating cut since the fall of communism after a new government led by the Law & Justice party took control of public media and initiated plans to overhaul the nation’s top court.

“This is a very serious warning,” said Rafal Benecki, the Warsaw-based chief economist at ING Bank Slaski SA. “The high momentum of negative political changes is something which can lead to deterioration of fundamentals. Thus the agency may want to cut the rating.”

Moody’s comments come as an overhaul of the judicial system has triggered protests by thousands of Poles and strained relations with its Western allies. Law & Justice annulled the previous government’s appointments to the top court, picked its own judges and revamped the tribunal’s rules to make it more difficult to strike down laws. Law & Justice leader Jaroslaw Kaczynski met last week with opposition groups to seek an end to the deadlock without reaching an agreement.

The zloty rose 0.2 percent to 4.2382 per euro at 5:20 p.m. in Warsaw, extending its gain in the past month to 1.9 percent, the third-best performing currency among 24 emerging-market currencies tracked by Bloomberg. The zloty and bond prices have recovered losses triggered by the S&P cut to BBB+ on Jan. 15.

“A downgrade by Moody’s would probably have a much more limited impact on the bond market than the S&P’s decision in January, mostly because it would not be entirely unexpected,” Piotr Kalisz, chief economist at Citigroup Inc.’s Polish unit, said in a report on Monday.

Finance Ministry spokesman Waldemar Grzegorczyk declined to comment about the Moody’s report on Monday when reached by phone. Poland could end up in front of European Court of Human Rights unless a solution is found to the current constitutional crisis, Thorbjoern Jagland, secretary general of Council of Europe, said today at a press conference in Warsaw.

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