Standard & Poor’s Downgraded Outlook for Zagreb’s Rating

The Standard & Poor’s (S&P) agency downgraded the credit rating outlook for the city of Zagreb from stable to negative on Wednesday, maintaining its current long-term rating at BB+, after last week reducing the outlook for the country’s credit rating.

According to S&P’s methodology, local and regional authorities can have a higher rating than the state if their credit characteristics are better and if they are not at risk of needing financial assistance from the state. However, analysts at the agency believe that local authorities, including Zagreb, currently do not meet these conditions.

Among other things, S&P considers that Zagreb does not have sufficient financial autonomy to effectively resist significant state intervention, particularly changes in the distribution of tax rates. Therefore, Zagreb cannot have a higher rating than Croatia, the S&P report states.

The agency downgraded the outlook for Croatia’s credit rating from stable to negative last week, maintaining the current rating for borrowing in foreign and domestic currencies at BB+. It noted that the revision of the Croatian rating outlook reflects the agency’s view that the continuation of economic weakness, along with limited reform achievements, will lead to a weaker fiscal situation than previously estimated.

The negative outlook for Zagreb means that S&P could downgrade its rating in the next 12 months, even if the state’s rating remains unchanged, in the event that the city’s budget situation or its liquidity significantly worsens. This could occur if budget revenues decline or if it becomes necessary for authorities to provide additional support to the company Zagrebački Holding.

A downgrade for Zagreb could also follow if the state’s credit rating is lowered. Likewise, if the outlook for Croatia’s rating is raised to stable, the outlook for Zagreb would likely improve, according to S&P’s statement.