S&P, Moody’s and soon perhaps Fitch as well – the Big Three rating agencies are critically reassessing their view of Poland. But actually it’s them that have been criticized in the past years. So, when it comes to Poland they are suddenly trustworthy again? S&P’s rating hardly relies on economic assessments. It rather seems like a political statement, designed to hurt the Polish government.
Zur deutschen Version: Credit Ratings für Polen fragwürdig
Poland has for years been known for its economic resilience and above-average growth rates. No wonder that in January, the news of a downgrade by S&P, lowering Poland’s long-term foreign currency credit rating from A- to BBB+, quickly made waves on the markets: trade on the Warsaw Stock Exchange slowed down temporarily and the Polish Złoty dropped significantly. The reason for the large impact of the news lies mainly in the surprising nature of the downgrade. Since 2007, Poland had been regularly receiving an A- from S&P. Just last August, the agency had confirmed that assessment and announced a positive outlook.
August 2015 – outlook positive
In the analysis published on 7 August 2015, the agency relied mostly on economic data and assessed Polish economic policy. S&P was already aware of an impending change in leadership. However, the „increased political uncertainty in light of the upcoming parliamentary elections“ was already reflected in the rating at the time. Only „reversals regarding fiscal consolidation, macroeconomic management, or monetary policy“ or slowing growth could cause the agency to revise its outlook from „positive“ to „stable“. Not even once is the possibility of a downgrade mentioned.
An unexpected downgrade
The sudden downgrade was thus not only unexpected, but also highly unusual with regard to common rating practices. „A change in outlook is not essential before the actual change in rating“, says Felix Winnekens in an interview with the Polish magazine PulzBiznesu (Business Puls). Mr Winnekens works for S&P in Frankfurt and is responsible for the ratings on Poland. „Our ratings always have to be up to date.“ On the other hand, he admits how error-prone ratings can be when it comes to forecasts. The changes in Poland „go beyond what we had anticipated regarding policy changes from the general election“, he notes in his analysis published in January 2016.
Rating is not based on economics…
He also defends the large influence of political indicators on his rating: „Institutional fundamentals of a given country usually cannot be changed easily and, for that reason, rarely constitute a key point of our rating reports. But in the case of Poland we are noticing a few decisions, which undermine the independence, efficiency and credibility of key state institutions in our opinion.“ This opinion of his is also reflected in his latest analysis. In the analysis of August 2015 economic reasoning had prevailed, but the one from January seems rather like a political statement. Especially the first paragraph might have just as easily been written by the Polish opposition.
…because the Polish economy is doing fine
So, in this rating, the political and institutional assessment played a big role. But if we take a look at the methodology of S&P’s ratings, we find that, next to „institutional effectiveness“ there are another four key criteria, which deal with growth, debt, liquidity and monetary policy, among others. According to S&P’s analysis, Poland is currently doing fine economically: relatively stable public debt, solid growth. At the same time, S&P criticizes initiatives of the new government, such as child benefits, which may raise the current-account deficit, or new taxes on banks, insurers and large retailers, because they may especially affect foreign companies in Poland. But all these economic factors explicitly do not (!) have an impact on the rating itself. „The committee agreed that the institutional assessment has deteriorated. All other key rating factors were unchanged.“
Central bank threatened?
The methodology seems questionable. Why should judicial or media policy have an impact on economic performance or creditworthiness? The independence and stability of institutions is generally important and desirable. For economic policy, the central bank plays the biggest role. In most countries, the central bank is technically supposed to be independent, but in fact subject to (political) influence. S&P also mentions the Polish central bank. But the alleged possibility of an institutional weakening of the Polish National Bank (NBP) does, again, not have an impact on the change of rating itself, it merely accounts for the negative outlook. The recent reaction by the second-largest rating agency Moody’s is thus much more coherent. In May, Moody’s maintained its rating of A2 (which roughly corresponds to S&P’s A-) and has changed their outlook to negative.
Civic Platform praised – despite problems
But even if we follow the logic of S&P and accept that political and institutional changes are more important, new questions arise: why were these criteria not equally important under the previous government? The Civic Platform (PO) pressured and even harassed numerous media outlets during their time in government. The Civic Platform was the one that started to undermine the independence of the Constitutional Court. The law which made that possible was passed in June 2015 – in August S&P reaffirmed their rating with a positive outlook. How does that make any sense? Since 2007, Poland had been ruled by a coalition of Civic Platform (PO) and Polish People’s Party (PSL) for eight years – and had been continuously rated A- by S&P despite rising public debt.
Rating agencies subject to controversy
It seems that the political bias against the Polish government, which has dominated (Western) European media and its political elites ever since it was elected in October 2015, has reached American companies as well. Not surprisingly, since the rating was conceived by a German in Frankfurt. Even though they appear politicized and unreliable, ratings have a huge influence. Businessmen and politicians alike take heed of them. In political debate, they are sometimes praised and sometimes discredited – depending on the situation.
— Nikolas J. Schmidt (@nikschm) May 12, 2016
If Moody's cuts tomorrow: "Stupid rating agencies! Worthless! Banksters!"
If Moody's maintains: "Rating agencies endorse our programme!"
— Exen (@Exen) May 12, 2016
Crisis, crisis, no solution
During the financial crisis of 2008 it was common to blame the Big Three rating agencies for giving overly optimistic ratings to dubious financial products. How reliable could a rating be in the first place, if you get paid by the entity you are supposed to rate? Two years later, when Europe had to deal with the sovereign debt crisis in Greece, politicians criticized those same rating agencies again. But this time their ratings were allegedly too critical of Greek sovereign debt – they were being too honest. It was even suggested to create a European rating agency to challenge the market power of the Americans in that field.
No reforms, capitalism self-fulfilling
That grand plan, however, was never brought to bear. So-called criticism of capitalism has since been on the rise in the Western world, especially among young people and intellectuals, albeit without a useful alternative. Politicians would be well advised to implement and/or reinstate sensible regulation to show that, with adjustments, markets do in fact make up the most efficient economic system. However, over the past years, systemic economic challenges have hardly been addressed – and the enormous market power of rating agencies has been left largely untouched. The crux of the matter is that ratings have the effect of self-fulling prophecies. Repeat the phrase „investors are worrying about fickle Polish economy“ often enough and investors will, in fact, start to worry.
Economic analysis should improve political decision-making
Political decisions should be guided by economic reasoning. Over the past few years, European politicians have often decided against the advice of economists due to alleged political necessities. Consulting with economists can be very useful, not only on explicitly economic issues. But economists should try to steer clear of political partisanship. S&P’s rating does in part not seem like an economic analysis, but rather like a political opinion. That’s why it should be taken with a grain of salt and a healthy portion of skepticism.
(c) Nikolas J. Schmidt
Quotes from the interview with Mr Winnekens were translated by the author from the Polish original.