Greece Cut Four Steps to Junk by Moody’s on ‘Risks’ (Update2)
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 warned of the rising economic cost of the debt- strapped country’s budget cuts.
The rating was lowered to Ba1 from A3, Moody’s said in a statement today in London, citing “substantial” risks to economic growth from the austerity measures tied to a 110 billion-euro ($134.5 billion) aid package from the European Union and the International Monetary Fund. The lower rating “incorporates a greater, albeit, low risk of default,” Moody’s said. The outlook is stable, it said.
Greece has cut spending, raised taxes and trimmed wages to tackle the deficit, which swelled to 13.6 percent of gross domestic product last year, more than four times the EU limit. To secure the EU-IMF aid, the government pledged to trim the shortfall to 8.1 percent of GDP this year and bring it back under the EU’s 3 percent limit in 2014. The crisis has prompted investors to sell the bonds of Greece and other high-deficit nations and pushed the euro down 15 percent this year.
“We’ve got a lot of uncertainty around the growth outlook for Greece,” Sarah Carlson, vice president-senior analyst in Moody’s sovereign-risk group, said today in a telephone interview. “It’s rare for a country to implement so much structural reform in a very short time.”
Austerity Measures
The austerity measures agreed to last month by the government of Prime Minister George Papandreou will amount to almost 14 percent of GDP over four years. The program, which also includes sweeping reforms to the country’s pension and labor markets, has prompted street protests and strikes, including one in which three people died.
Greece, which already was rated junk by Standard & Poor’s, said the Moody’s downgrade “does not reflect in any way Greece’s progress over the past months,” according to a statement from the Finance Ministry in Athens.
While the EU-IMF “package effectively eliminates any near- term risk of a liquidity-driven default,” Moody’s said, there remains “considerable uncertainty surrounding the timing and impact of these measures on the country’s economic growth, particularly in a less supportive global economic environment.”
Government Bonds
The euro pared gains against the dollar after the downgrade and traded at $1.2230 at 9:22 p.m. in London, up 1 percent on the day, after advancing to $1.2299 earlier. The premium investors demand to hold Greek 10-year government bonds over benchmark German bunds rose eight basis points today to 568 basis points.
“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.”
As EU and IMF officials began talks in Athens today as part of regular checks on the government’s budget plans, EU spokesman Amadeu Altafaj told reporters in Brussels that the 27-nation bloc is “optimistic” about Greece’s ability to implement the program. That follows comments by Deutsche Bank AG Chief Executive Officer Josef Ackermann last week that he is “confident” Greece can repay its debt because the nation is committed to reform.
Bondholders
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.
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