Wednesday, 14 January 2009

S&P cuts Greece’s credit rating

Greece on Wednesday became the first western European economy to have its credit ratings downgraded since the credit crisis blew up in August 2007, because its high levels of public and private debt.

Standard & Poor’s moved swiftly to cut the country’s credit ratings after warning of a possible downgrade only five days ago. The euro fell sharply against the dollar, while the gap between Greek and German bond yields rose to fresh record highs.

Marko Mrsnik, S&P analyst, said: ”The global financial and economic crisis has, in our opinion, exacerbated an underlying loss of competitiveness in the Greek economy.”

Greece’s sovereign credit ratings were downgraded from A, which is five notches below the top triple-A rating, to A-minus.

S&P’s decision follows its recent warnings to Spain, Portugal and Ireland that their credit ratings could be downgraded because of their deteriorating public finances.

Earlier on Wednesday, problems mounted for Greece and other so-called peripheral eurozone economies on reports that Ireland was planning to seek help from the International Monetary Fund.

The report sent bond spreads between Germany and the rest of the eurozone to fresh highs since the launch of the single currency in January 1999.

Credit default swaps – a form of insurance against bond defaults – of the peripheral nations also rose sharply, implying the economies of these countries are increasingly in danger of defaulting.

Bonds and CDS prices of Italy, another peripheral nation, have also been hit, although S&P this week reaffirmed its ratings on the country in spite of its massive public debt of more than 100 per cent of gross domestic product. Italy’s banking and housing sectors are seen as being more stable than the other economies.

Greece, on the other hand, has seen its current account deficit soar above 14 per cent, the highest in the eurozone, while its debt to GDP ratio has risen to 94 per cent – second only to Italy in the eurozone.

With labour costs rising and recent street demonstrations against the government, most analysts view Greece as the weakest economy within the eurozone and the one most likely to hold back recovery.

S&P said the country’s repeated failures to stick to budgetary plans had led to structural weaknesses in fiscal management.

The agency added that it believed the sizeable share of social transfers, public wage bill and interest payments in public expenditure highlighted the need for reform.

Copyright The Financial Times Limited 2009


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