Standard & Poor's (S&P) on Wednesday downgraded its outlook on the City of Zagreb from stable to negative, retaining the existing long term rating of BB+ after downgrading the outlook on Croatia last week.
According to S&P's methodology, local and regional governments can have higher ratings than the state if their credit features are better and if they do not face the risk of having to ask the state for financial assistance. However, S&P analysts believe that local governments, including Zagreb, do not meet those requirements.
S&P believes that Zagreb does not have sufficient financial autonomy to effectively resist a significant state intervention, notably tax changes, and that, therefore, Zagreb cannot have a higher rating than Croatia.
S&P last week downgraded the outlook on Croatia from stable to negative, retaining the existing BB+ rating for borrowing in foreign and domestic currency.
Zagreb's negative outlook means the financial services company can downgrade its credit rating in the next 12 months, even if the sovereign rating remains unchanged, if the city's budget and liquidity deteriorate. This would happen if budgetary revenues dropped or if the government had to additionally support the Zagrebacki Holding company.
Zagreb's rating could also be downgraded if the sovereign rating was downgraded. Likewise, if the outlook on Croatia is revised to stable, the capital's outlook is likely to improve too.
