International ratings agency Standard & Poor's on Thursday downgraded Libya's sovereign rating to junk status and suspended its ratings for the country. Also, the rebel-led government in the nation's east said it would honor existing contracts with international oil companies.
The twin developments spotlighted the challenges confronting an oil-rich nation that just weeks ago was well on the path to redemption after enduring years of sanctions as a pariah supporter of terrorism.
S&P said it lowered its long- and short-term sovereign credit ratings for Libya to BB/B from BBB+/A-2, and removed the ratings from CreditWatch negative. It also said it decided to suspend its ratings on Libya "due to the imposition of sanctions and because of a lack of reliable economic and political information."
"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," S&P said.
Another ratings agency, Fitch, downgraded Libya's ratings to junk status on March 1.
Forces loyal to Libyan leader Moammar Gadhafi have been battling rebels for weeks in the most violent of the anti-regime protest movements to have hit the Arab world. The fighting has crippled the country's vital oil sector, sending production plummeting.
The rebel-led governing council in the east has been working to present itself as a reliable partner to the international community, pledging it would continue with oil exports even as experts doubted that much was flowing from the country because of the violence.
On Thursday, the spokesman for the council, Abdel-Hafidh Ghoga, said that they "have assured everybody we respect all contracts with Libya, especially with oil companies."
"There were signed contracts regarding the provision of oil," Ghoga told reporters in Benghazi. "We have respected these contracts, and it is only normal for revenue to be diverted to the Transitional National Council, the legitimate representative of the Libyan people."
He said the transitional government would "take care of it, and use it according to our needs."
The comments appeared to reflect the intention of the rebels to stake a claim to the country's oil revenues.
Sanctions are being heaped on the country by the European Union, the United States and the United Nations, even as the international community weighs its options during a government offensive against rebel territory in the east.
The sanctions include freezing assets held by Gadhafi and his family, other key officials, the central bank and the country's sovereign wealth fund. In the U.S. alone, $32 billion in Libyan funds have been frozen, according to the Treasury Department.
It's also unclear how much, or for how much longer, Libya can continue to supply or produce oil.
Foreign workers who played a key role in the sector have fled the country in the wake of the violence. The country's oil minister, Shukri Ghanem, said production was down to about 500,000 barrels per day, roughly one third its normal output.
At least two key ports are shut while Ras Lanouf, the site of a major oil installation, was the focus of an offensive by Gadhafi supporters on Thursday. Libyan oil officials in several of these areas say that tankers have been unable to load. Production from fields that feed into the Marsa al-Brega complex in the east are producing at just 10 percent of their nearly 100,000 barrel per day capacity.
Even if the oil were flowing, it appeared increasingly unlikely that the funds would come to the country during the sanctions.
"We believe that these sanctions will make financing of any budget deficit or current account deficit difficult or unfeasible," said S&P. "We expect that this, coupled with a sharp drop in oil production from foreign operators, will place severe economic pressure" on the Gadhafi government.
Associated Press writer Ryan Lucas contributed to this report from Benghazi, Libya.