Markets Fall as Moody’s Downgrades Greece

Prime Minister of Greece, George Papandreou

The US and Australian markets fell over 1st – 2nd June 2011 following disappointing manufacturing and employment indicators. In addition, the downgrading of Greek local and foreign currency bond ratings to Caa1 from B1 gave traders further cause for concern.

Ben Potter, research analyst at IG Markets said:

“The S&P 500 fell the most since August last year – losing 2.3% – as did the NASDAQ, while the Dow Jones Industrial Average slumped 2.2%.

“Across Asia, regional markets are all sharply lower following the strong sell-off on Wall Street and the continuing stream of weaker-than-expected global economic data. The Shanghai Composite is the biggest decliner – down 2% – while elsewhere the Nikkei 225, Hang Seng and Kospi are all down between 1.4% and 1.7%.

“In Australia, the ASX 200 is currently 2.2% weaker at 4602, just off its session low of 4600.”

The FTSE 100 was down 55.62 by 09:40 BST on 2nd June 2011, though it is expected that Q1 results from Kingfisher and full year results from ASOS could soften the blow.

Moody’s downgraded Greek bond ratings for the following reasons:

“1. The increased risk that Greece will fail to stabilise its debt position, without a debt restructuring, in light of (1) the ever-increasing scale of the implementation challenges facing the government, (2) the country’s highly uncertain growth prospects and (3) a track record of underperformance against budget consolidation targets.

“2. The increased likelihood that Greece’s supporters (the IMF, ECB and the EU Commission, together known as the “Troika”) will, at some point in the future, require the participation of private creditors in a debt restructuring as a precondition for funding support.

“Taken together, these risks imply at least an even chance of default over the rating horizon. Moody’s points out that, over five-year investment horizons, around 50% of Caa1-rated sovereigns, non-financial corporate and financial institutions have consistently met their debt service requirements on a timely basis, while around 50% have defaulted.

“Greece’s Caa1 rating incorporates Moody’s assumption that current negotiations between the Greek government and the Troika will result in further official support for the Greek government and the announcement of additional austerity and structural reform measures.

“The negative outlook on the Caa1 rating reflects Moody’s view that the country’s very large debt burden, the significant implementation risks in its structural reform package, and the country’s ongoing need for external support skew risks of future rating actions to the downside.”

In a press conference alongside the Prime Minister of Canada on 28th May 2011, the Greek Prime Minister George Papandreou responded to questions about Greek’s debt by attacking “prophets of doom”:

“I can tell you that in the last one and a half year, almost daily, and certainly every week, we have analysts who make predictions about what will happen in Greece.

“People seem to have become specialists in terms of our economy throughout the world, and can be heard everywhere by anyone.

“What I think we have proved here in Greece is that we have achieved impressive goals, very impressive goals, like reducing the deficit by 5%. Currently a rise in our exports. Inflation fell and look forward to a good season. We, therefore, have important signs of change and evolution.

“Of course there is still much to be done. We have a large privatization program, we have taken decisions which will come into force in the coming weeks. It will certainly require further fiscal adjustment. And the Greek people have shown great willingness to accept sacrifices for our country.

“My goal is to continue with this program because I believe that by implementing this program we will move towards a sustainable Greek economy.”

The problem of Greece’s debt has led to questions over the integrity of the Eurozone. The Greek Treasury vigorously defended its action against the ratings cut, calling the move “pre-emptive”:

“The decision has clearly been influenced by the intense and unfounded rumours in the media and disregards the unprecedented commitments made by the Greek Government to meet its fiscal target for 2011 and to accelerate its privatization programme.”

“…Moody’s decision to cut Greece’s credit rating before assessing the Medium-term Fiscal Strategy and updated Memorandum of Understanding, highlights once again that its ratings are driven more by market rumours rather than objective facts.”

The government will present its Medium-term Fiscal Strategy to the Greek parliament within the next few days.

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