The Standard & Poor's (S&P) cut its sovereign ratings on Pakistan further into 'junk' territory on Friday, highlighting the country's difficulty in raising the money it needs to avoid defaulting on debt obligations. The latest cut marks S&P's second downgrade of Pakistan's ratings in as many months. To debt investors, Pakistan's most pressing obligations are $500 million in bonds maturing in February. The risk of default on that have sent the cost of insurance in Pakistani debt soaring this year. "The downgrade reflects our view that the delay by Pakistan in securing external assistance has increased the prospect of near-term debt service difficulties, heralding either a rescheduling of commercial external debt or an outright payment default," said the S&P's Agost Benard.
S&P cut its long-term foreign currency rating on Pakistan to CCC from CCC-plus and its long-term local currency rating to CCC-plus from B-minus. The agency placed its outlook on the country as 'developing'.
It said even if Pakistan got the needed loans, it could spark popular discontent, and political instability would make it hard to implement the policies needed to stabilise the economy.
Pakistan's credit defaults swaps barely reacted to S&P's move given few investors are willing to trade the contract. A government official told Daily Times the cut in credit rating would make it difficult for Pakistani companies to open letters of credit with foreign companies.