S&P Cuts Libya To Junk

Only the most intrepid global capital markets investors would put money into Libya’s debt. Now even those buyers of sovereign paper have been forewarned. According to the S&P, “lowered its long- and short-term sovereign credit ratings on the Socialist People’s Libyan Arab Jamahiriya (Libya) to ‘BB/B’ from ‘BBB+/A-2’ and removed the ratings from CreditWatch.”  The agency also provided:

The downgrade reflects heightened political risk, sharply reduced economic output, and uncertainties stemming from a possible regime change, all related to the outbreak of civil war in Libya and the imposition of international sanctions. We understand that the Libyan central government has neither commercial debt (foreign or local currency) nor sovereign guarantees on the debt of public enterprises or other entities. We believe that the government will not have access to external borrowing because of international sanctions or domestic borrowing because of Libya’s undeveloped financial markets. Therefore, we do not believe that the risks of a government default currently exceed those consistent with a ‘BB’ rating.

The rating call is meaningless, given how far it falls after the trouble in Libya – as many S&P and Moody’s changes are. Libya is not raising capital and will issue no new bonds. The value of current bonds is so far below par that the certificates are worth little more than newsprint.

S&P will begin to rate Libya again once a new regime, or the old one, is in place. S&P will up Libya’s rating as if the bond market does not watch the news and cannot make an educated set of judgments on its own.

Douglas A. McIntyre