Greece sinks further into junk territory

2nd June 2011

Mindful Money economist blogger Shaun Richards says: "I would imagine most peoples' response to this was some version of ‘not again'. There are two additional points to be made. Firstly, Caa1 implies a degree of accuracy that the system simply does not have and it is more helpful to think of a move from b to c. Secondly that these scales end at d and not z and in essence it is d for default…

… If we look at the economics of the situation we see that as ever the ratings agencies are behind the times. As I have written many times Greece will have to restructure her debts and the delay in so doing has worsened her position. It has also been apparent for some time that the Greek government has said one thing and done another…"

On the impact for the UK, Shireblogger comments on the blog: "I note your Mindful colleague, Simon Ward, points out that UK banks have bought the lion's share of Government debt for the last six months whilst foreigners have taken a 'pass'. No doubt we should be applauding the inverse QE boost this is delivering, grateful for the banks' spondoolies. In a way, peripheral eurozone trouble might be good for the UK if it creates a 'flight to quality' back into gilts. Funny old world."

The downgrade places Greece at the very bottom of Moody's league table of credit-worthy European countries, adds the Daily Telegraph.

Five-year credit default swaps (CDS) on Greek government debt rose 40 basis points to 1,470 basis points, according to data monitor Markit. This means it costs €1.47m euros to protect €10m of exposure to Greek debt, the report adds.

Greece is understood to have agreed to €6.4bn (£3.9bn) of fresh austerity measures, including tax increases and accelerated privatisations.

Moody's justified the downgrade by arguing that Greece will fail to meet the debt reduction targets that were set as part of its existing bailout deal. The Athens government, though, said Moody's had failed to appreciate the efforts it is taking to bring its debts under control.

"Over five-year investment horizons, around 50% of Caa1-rated sovereigns, non-financial corporate and financial institutions have consistently met their debt-service requirements," Moody's said. "Around 50% have defaulted."

Greece responded by saying Moody's was not taking into account Athens' efforts to put the country's finances on an even keel, says a report in the Financial Times (paywall).

Bloomberg reported that Greece has "entered the debt rating hall of shame", with only Ecuador sporting a worse rating.

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