S&P downgrade on Poland sends yields sharply higher

Poland’s cost of external financing increased significantly after Standard&Poor’s reacted to recent moves by the newly-elected government to strengthen its grip on power, downgrading both the ratings and the outlook on the country's sovereign debt.

The news sent yields on Poland’s benchmark 10-year government bonds higher by 26 basis points, the most in two years, to 3.24%.

After the close of markets on 17 January, ratings agency S&P lowered its rating on the country’s sovereign debt to BBB+, its third lowest investment grade rating.

The outlook on the country’s debt was downgraded to ‘negative’ from ‘positive’ to boot.

That meant S&P now saw a one-in-three chance of a further ratings downgrade within the next 24 months, “if monetary policy credibility is undermined or if public finances deteriorate beyond our current expectations”.

“The downgrade reflects our view that Poland's system of institutional checks and balances has been eroded significantly as the independence and effectiveness of key institutions, such as the constitutional court and public broadcasting, is being weakened by various legislative measures initiated since the October 2015 election,” the ratings agency said in a statement.

New laws from Warsaw allowed the government to change the composition of the country’s highest legal power - the constitutional court - control the directors of public broadcasters and removed a constraint regarding previous party membership for senior civil servants, the agency explained.

There were also risks that the independence of the country’s central bank might be further eroded.