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Europe

S&P downgrade deals battered economy further blow

Text by News Wires

Latest update : 2009-12-17

Standard & Poor's was the second international ratings agency to lower Greece's long-term credit rating this week. It warned that the rating could drop further if the government failed to reduce public debt.

REUTERS - Greece suffered the second downgrade of its credit rating in a week on Wednesday, hours after its finance minister revealed plans to resume borrowing from bond markets early next year to fill a yawning budget gap.

Standard & Poor's cut Greece's rating by one notch, to BBB-plus from A-minus, saying austerity steps announced by Prime Minister George Papandreou this week were unlikely to produce a "sustainable" reduction in the public debt burden.

It kept a negative outlook for the rating, warning another downgrade was possible if the government failed to gain domestic political support for fiscal reforms.

"We believe that the government's efforts to reform the public finances face domestic obstacles that would likely require sustained efforts over a number of years to overcome," S&P said.

Greece said after the S&P downgrade it would stick to a plan announced by Greek Prime Minister George Papandreou on Monday to reduce its budget deficit below 3 percent of GDP by 2013.

"We seriously take into account any international appraisal that concerns and influences our country," Greece's finance ministry said in a statement. "But we have our own strategy and we stick to it."

An early taste of public discontent in Greece will come on Thursday in a one-day strike planned by communist labour group PAME to protest the government's austerity measures.

Last week, Fitch ratings cut Greece to BBB-plus, the lowest sovereign rating in the euro zone, from A-minus. Moody's, the third big rating agency, has placed Greece's A1 rating on review for a possible cut.

Finance Minister George Papaconstantinou is racing around European capitals in an effort to reassure investors and keep alive Greece's ability to borrow from the markets.

Confidence deficit

In an interview with Reuters television shortly before the S&P downgrade, he acknowledged that Greece faced a "confidence deficit" but predicted markets would become more willing to buy Greek debt as they saw Athens implement plans for spending cuts.

"I think that is what they are waiting for -- to see the translation of what we are saying in the legislation into actual expenditure changes," said Papaconstantinou, a 47-year-old former economics professor who took his post as part of a new Socialist government in October.

He said comparisons of Greece by some analysts with crisis-hit Dubai or bankrupt Lehman Brothers were "far-fetched."

The markets have been speculating that Greece might eventually need a bailout from its European Union partners, if its problems threaten to damage the euro currency zone. But the country is determined to solve its problems on its own, Papaconstantinou said.

Greece expects to return to the international bond markets in late January, raising some 10 percent of its 2010 funding needs during the month, he added.

The government has promised spending cuts, tax hikes, efficiency gains and a crackdown on tax evasion next year in order to bring state finances under control. Papaconstantinou said he expected Greece to borrow between 52 and 53 billion euros in all of 2010.

That would be a big drop from the 66 billion euros which the country has borrowed this year. The budget deficit for 2009 has swollen to an estimated 12.7 percent of gross domestic product; in 2010 Greece is officially projected to be the euro zone's most indebted economy with public debt at 121 percent of GDP.

Market reaction

S&P's downgrade came as little surprise to financial markets so investors' reaction on Wednesday was much calmer than the turmoil which followed Fitch's action last week.

Credit default swaps on Greece's debt, which express the cost of insuring against a default, rose only marginally to 240 basis points from 238.5 bps previously, CMA DataVision said.

The spread of the 10-year Greek government bond yield over the benchmark German Bund yield barely moved. Earlier in the day, it had tightened by 17 bps to 235 bps, suggesting a slight increase in optimism over Greece.

One reason for optimism was a sale by Greece of 2 billion euros of five-year floating rate notes to banks in a private placement on Wednesday.

This allowed the country to raise money without taking the risk of offering debt to the markets, and confirmed that the government retained access to financing. Four of the five banks which bought the notes were Greek.

"What it does...is provide a backstop to the market, and also makes a loud statement that Greece still has no problem raising funds," said Calyon rate strategist Peter Chatwell.

But Petros Koutsorizos, treasurer at Proton Bank in Athens, said confidence in Greece was unlikely to recover much until the government gave details of its austerity drive early next year.

 

Date created : 2009-12-17

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