Fitch move sparks fears of painful cut in Czech credit rating
Top international credit rating agency Fitch has downgraded its outlook for the Czech economy from stable to negative. This has sparked fears it could also cut the Czech Republic’s credit rating – only adding to its mounting economic woes. I discussed the revised outlook with Lukáš Kovanda, chief economist at Trinity Bank.
“The main reason is the situation in Ukraine and its potential impact on the Czech economy, especially its energy supplies.
“This is because of our high dependency on Russian gas and to a large extent on Russian oil.
“So there is a fear amongst the international finance community that an interruption of those supplies could bring a big crash to the Czech economy.”
There’s also speculation that after it had almost a quarter century of upward trajectory, Fitch may also revise downwards the Czech Republic’s credit rating from the current AA-, which is the second highest level. How likely is that, do you think?
“I think now it’s quite likely, maybe 60 percent, for the next 12 months, I guess, because the current situation is very pessimistic for the Czech economy, because of our proximity to Ukraine and to Russia, and our strong dependence on Russian energy supplies.
“And we have had problems for quite a long time with the public finances.
“Our public debt has been growing at one of the highest paces among European Union countries.
“So firstly we need to stabilise our public finances, but because of the war I think it’s a pretty difficult and complex task.
“I am afraid that we will not be able to stabilise it quickly enough for rating agencies, at least some of them, to not lower their ratings of Czech debts.
“So I think maybe some ratings agencies, maybe with Fitch being the first of them, will downgrade our rating in the next 12 months.”
That probably sounds rather abstract to a lot of people. What would it mean in practice if Fitch did go ahead and revise downward the Czech Republic’s credit rating?
“When there is a downgrade of the rating, the likelihood of some kind of default increases.
“And it means that international investors would demand higher interest payments from the Czech government to lend money to that government.
“For the Czech government it means it will have to pay high interest, so it will have less money for pensions, for social entitlements, for infrastructure, for construction investments and other classical goals of public finances.
“So the government would need to make some so-called austerity measures or to increase taxes, both of which are unpopular amongst the general public – especially at a time of very rapid inflation, the negative impacts of the pandemic and, of course, the war in Ukraine.”