Region: Slovakia recovers from ratings fall

By Beata Balogová

For the Slovak Spectator

Despite high unemployment and rising concerns over fiscal solvency, Slovakia's long-term financial prospects are far less grim than those of its fellow eurozone members, experts say.

Nine European countries, including Slovakia, lost a round of the ratings game Jan. 13 as the international credit rating agency Standard & Poor's (S&P) downgraded the countries' long-term rating, in a move that sparked global concerns over the eurozone's ability to pay off its climbing debt.

The Slovak rating fell one notch, from A+ to A, but unlike the other eight eurozone countries affected, its future outlook was ranked as "stable" rather than "negative," meaning a further credit downgrade in the near future was judged to be less likely.

Slovakia has thus joined Germany, which retained its top AAA rating, as the only eurozone country with a stable outlook.

Local politicians have blamed the downgrade on a domestic failure to implement key economic reforms. On Jan. 19, Finance Minister Ivan Mikloš criticized the fall of Iveta Radičová's government in October last year, and the subsequent failure to carry out several important reforms, as the main culprits behind the country's economic conundrum.

"The unstable political situation made us unable to fulfill our obligations," he told the Slovak News Agency. "If early elections had not been called, we could have fulfilled them."

The downgrade brought no immediate problems for domestic markets. Days after the Standard & Poor's decision, Slovakia's debt servicing agency sold state treasury bills on more favorable terms than it had just last summer, and Deputy Finance Minister Vladimír Tvaroška announced he did not expect any dramatic effect on the financial market.

Local market watchers, who expect the downgrades will put extra pressure on the eurozone to seek remedies for its debt crisis, say the effect would have been more dire for Slovakia if it had been the only country to see its rating cut.

"Impacts on state debt financing could have been worse if it had been only the rating of Slovakia, or if only a small number of countries had been downgraded," the head of Slovakia's Debt Management and Liquidity Agency (ARDAL), Daniel Bytčánek, told The Slovak Spectator Jan. 19. "What is important is the stable outlook of the rating, which has assured investors that in the coming period, no further downgrades of Slovakia's rating can be expected. It distinguishes us from other eurozone countries."

However, Bytčánek said he expected the state's debt-servicing costs to gradually rise, with a negative impact on those seeking bank loans. This will mostly affect businesses, local governments and households, Bytčánek added.

The slowing economies of other countries in the European Union and the eurozone portend a difficult 2012 for Slovakia, but predictions for its economy still see growth of around 1.7 percent, according to Finance Ministry figures.

Though the country is currently struggling with a 3.3 billion euro state deficit and an average unemployment rate of 13.7 percent, analysts say the ratings downgrade was largely caused by eurozone membership rather than internal factors.

Through the downgrade, ratings agencies communicated their concern that the causes of the debt crisis have not been sufficiently understood or responded to at the European level, said Vladimír Zlacký, chief economist at UniCredit Bank.

The final breaking point was the latest crisis summit Dec. 8-9, in which eurozone members failed to reach a sufficient breakthrough in resolving the crisis, he added.

However, Zlacký does not expect the lowered rating to lead to a considerable increase in the cost of servicing Slovakia's debt.

"Ratings agencies follow the development on financial markets," he said. "For some participants in the market, lowering the rating of the nine countries, including Slovakia, is not a new factor in their calculations."

So far, the rating downgrade has not been reflected in the margin demanded for state treasury bills, according to Bytčánek, whose debt servicing agency ARDAL sold 364-day state treasury bills worth 294.5 million euro at a Jan. 16 auction, with foreign investors purchasing 1 million euros of the notes.

"We have sold them on even more advantageous terms than last summer," he said.

In terms of interest margins, Bytčánek said the rating downgrade will have a negative impact on long-term securities, but noted that sales of these are very limited.

Aside from its own fallen rating, Slovakia faces potential fallout from a coinciding S&P decision to downgrade the rating of the European Financial Stability Facility (EFSF), the eurozone's temporary sovereign bailout fund.

"There will be more intense pressure on increasing the guarantees and the engagement of particular countries, which if carried out will negatively impact Slovakia," Bytčánek said.

In some cases, these lowered ratings were "not entirely fair [or] logical," he added; some non-eurozone countries whose public finances were in worse shape than Slovakia's now have a better rating than countries with "a better actual state of public finances and larger responsibility for the functioning of the union and the eurozone."

Nevertheless, the EFSF's new credit rating, at AA+, is still very good, Bytčánek concluded.

- Markéta Hulpachová contributed to this report.

Beata Balogová can be reached at news@praguepost.com