The deteriorating creditworthiness of the sovereign has already done damage to the economy. And the further the country slips down the rating scale, the more dire the degree.
Consequently, when Moody’s wields its axe the subsequent sell-off in the domestic bond market is expected to be short-lived. So, all well and good then? D-Day is priced in. And as such, its impact on the bond market will be temporary. Not so fast. As reassuring as this benign market outlook might be, it’s no reason to ignore the economic effects of the sovereign’s deteriorating credit quality. These effects have already been harmful and there’s more pain to come the deeper the country sinks into the subinvestment abyss.
But it gets worse. The credit ratings of critically important SOEs are tied to the sovereign’s . And so their creditworthiness too has suffered. For the many overindebted and cash-strapped ones, escalating borrowing costs only made matters more dire, again at the expense of the economy. In several cases vital infrastructure investment was jeopardised, while at the same time growth-inhibiting tariffs were hiked. Talk about a double-punch.
The consequences have been predictable. In confronting these challenges in an environment of persistently low economic growth, banks have had to adopt more conservative lending policies. And, where credit has been extended to public and private sector debtors, they have had to do so at higher interest rates. In short, many borrowers have had to become accustomed to tighter financial conditions, even though the repo rate has fallen somewhat.
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