Greece Cut Four Steps to Junk by Moody’s on ‘Risks’ (Update1)
June 14, 2010, 3:15 PM EDT
(Updates with comment from analyst in fourth paragraph. For more on the debt crisis, see EXT3 )
By Ben Martin and Maria Petrakis
June 14 (Bloomberg) — Greece’s credit rating was cut four steps to non-investment grade, or junk, by Moody’s Investors Service, which cited the country’s economic “risks.”
The rating was lowered to Ba1 from A3, Moody’s said in a statement today from London. The outlook is stable, it said. Moody’s said the Ba1 rating “incorporates a greater, albeit, low risk of default.”
Greece, which already is rated junk by Standard & Poor’s, last month agreed to a package of additional austerity measures to qualify for financial aid from the European Union and the International Monetary Fund.
After that 110 billion-euro ($134.5 billion) Greek lifeline failed to contain the fiscal crisis, the EU announced on May 10 a 750 billion-euro backstop to shore up the finances of the region’s weakest economies amid concern governments will struggle to tackle their budget deficits. The turmoil has prompted investors to sell the bonds of Greece, Spain and Portugal and pushed the euro down 15 percent this year.
“This doesn’t look good and I expect another round of sell-off,” said Christoph Rieger, co-head of fixed income strategy at Commerzbank AG in Frankfurt, Germany’s second largest bank. “A junk status means it will fall out of some benchmark indices. People who use those benchmarks are likely to sell.”
The premium investors demand to hold Greek 10-year government bonds over benchmark German bunds rose eight basis points today to 568 basis points.
The government in Athens said the downgrade by Moody’s doesn’t reflect the progress it has made in reining in its deficit. The package announced by Prime Minister George Papandreou includes wage and pension cuts and tax increases that have prompted street protests and strikes, including one in which three people died.
“Today’s downgrade of the Greek economy by Moody’s in no way reflects the progress achieved in recent months nor does it reflect the prospects being opened up by fiscal adjustment and the improvement of the country’s competitiveness,” the Greek Finance Ministry said in a statement. “The Greek government remains absolutely committed to the task of fiscal adjustment and improving the country’s growth prospects.”
Moody’s said the “macroeconomic and implementation risks” associated with the EU-IMF support program “are substantial and more consistent with a Ba1 rating.”
“There is considerable uncertainty surrounding the timing and impact of these measures on the country’s economic growth, particularly in a less supportive global economic environment,” Sarah Carlson, vice president-senior analyst in Moody’s sovereign risk group, said in the statement.
“It’s a significant downgrade,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley Smith Barney. “It’s not a surprise to people, but the timing and magnitude is what has taken Treasuries off the lows and is providing some support.”
The yield on the 10-year Treasury note rose three basis points to 3.33 percent.
S&P cut Greece’s credit rating to non-investment grade on April 27, the first time a euro member lost its investment-grade since the euro’s 1999 debut. S&P warned that bondholders could recover as little as 30 percent of their initial investment if the country restructures its debt.
Moody’s today also downgraded its rating on the city of Athens to Ba1 from A3, citing “the uncertainties arising from current reforms on the city’s finances.” Athens and other Greek municipalities “are unlikely to have enough financial flexibility to permit their credit quality to be stronger than that of the sovereign itself,” it said.
–With assistance from Anchalee Worrachate in London and Benjamin Levisohn in New York. Editors: Daniel Tilles, Dave Liedtka