GREECE’S CREDIT ratings were downgraded to the lowest level in the euro zone yesterday as fears mounted over its deteriorating public finances.
Heavy selling of Greek stocks and bonds came amid fears that the country was heading for financial disaster unless politicians tackle dangerously high debt.
Fitch cut ratings on Greek debt to BBB plus, with a negative outlook. It is the first time in 10 years a leading ratings agency has given Greece a rating of below A grade.
Greek finance minister George Papaconstantinou said the country would do “whatever is required” to reduce a record budget deficit and achieve its medium-term fiscal targets.
He said the downgrade reflected Greece’s “mounting credibility gap in recent years and an exceptionally difficult fiscal situation” faced by the new government, which took over in October.
Fitch said the downgrade “reflects concerns over the medium-term outlook for public finances, given the weak credibility of fiscal institutions and the policy framework in Greece, exacerbated by uncertainty over the prospects for a balanced and sustained economic recovery”.
Moody’s and Standard Poor’s, the other main ratings agencies, have also warned Greece it could be downgraded owing to its debt, which is forecast to rise to 125 per cent of gross domestic product (GDP) next year.
Mr Papaconstantinou said Fitch and Standard Poor’s had failed to take into account recent government initiatives described as positive by the European Commission.
Concern is focusing on whether Greece will be able to implement new revenue-raising measures swiftly enough to cut the deficit from 12.7 per cent to 9.1 per cent of GDP next year, in line with budget projections.
Mr Papaconstantinou said Greece was prepared if necessary to produce a supplementary budget in 2010.
Analysts warned the downgrade could pose problems for Greece in raising money in the bond markets and through the European Central Bank’s (ECB) liquidity operations.
Under pre-financial crisis rules, the downgrade would have disallowed Athens from exchanging sovereign bonds for ECB loans, as their credit ratings would no longer be strong enough.
Although the ECB will keep the emergency rules next year, Greece must reduce its deficit soon. The relaxed ECB rules allow for collateral of bonds with ratings of BBB minus.
Goldman Sachs said: “Unless the ECB fiddles with its rules before the end of next year, from the beginning of 2011, Greek sovereign bonds will no longer be eligible for ECB collateral.” – (Copyright The Financial Times Limited 2009)
