Fitch downgrades Libya because of political violence
Fitch has downgraded Libya from BBB to BBB+ and placed them on credit watch negative. Via Fitch:
"The downgrade reflects the eruption of political risk evidenced by the increasing momentum of the popular uprising aimed at ending Muammar Gadhafi's 42-year rule," says Charles Seville, Director in Fitch's Sovereign Ratings Group. "The Rating Watch Negative reflects the wide range of possible political outcomes."
Lack of a political resolution to the conflict and escalating violence would likely result in a further downgrade. This would especially be the case if disruption extended to Libya's oil production. Political reforms and/or outright regime change is also unlikely to be smooth, given the absence of a mechanism to guide any transition. However, political reforms which successfully quelled unrest would help stabilise the rating.
Libya's credit profile balances substantial oil and financial wealth against fragile and idiosyncratic political institutions. Sizeable political risk is already incorporated into the rating. With no formal constitution in place, it has never been made clear how and to whom the Libyan leader - who holds no formal political office - would hand over power. This uncertainty is magnified by the present circumstances. Under the system of revolutionary direct democracy presided over by Mr. Gadhafi, there has been limited space for dissent against the government, as recognised by the World Bank's governance indicators, which Fitch uses as a benchmark.