Published: December 8 2009 13:34 | Last updated: December 8 2009 18:22
Greece saw its credit ratings downgraded to the lowest level in the eurozone on Tuesday 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 tackled dangerously high debt levels. Shares on the Athens stock exchange fell more than 6 per cent.
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.
George Papaconstantinou, Greek finance minister, 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 Socialist 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 next year.
Mr Papaconstantinou said both Fitch and Standard & Poor’s had failed to take into account recent government initiatives described as positive by the European Commission. “Many analysts express mistrust ... which has to do with the gap between words and actions in recent years.”
Mr Papaconstantinou was referring to Greece’s repeated failure since joining the euro in 2001 to carry out structural reforms and keep the deficit within the eurozone limit of 3 per cent of gross domestic product
Concern focuses 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.
Anders Borg, finance minister of Sweden, which holds the EU presidency, said: “They [Greece] need to get serious about their fiscal situation. You can’t run a 10 or 12 per cent deficit.”
Analysts also warned that the downgrade could pose problems for Greece in raising money in the bond markets and through the European Central Bank’s 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 good 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, then from the beginning of 2011, Greek sovereign bonds will no longer be eligible for ECB collateral.”
Heavy selling of Greek stocks and bonds came amid fears that the country was heading for financial disaster unless politicians tackled dangerously high debt levels. Shares on the Athens stock exchange fell more than 6 per cent.
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.
George Papaconstantinou, Greek finance minister, 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 Socialist 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 next year.
Mr Papaconstantinou said both Fitch and Standard & Poor’s had failed to take into account recent government initiatives described as positive by the European Commission. “Many analysts express mistrust ... which has to do with the gap between words and actions in recent years.”
Mr Papaconstantinou was referring to Greece’s repeated failure since joining the euro in 2001 to carry out structural reforms and keep the deficit within the eurozone limit of 3 per cent of gross domestic product
Concern focuses 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.
Anders Borg, finance minister of Sweden, which holds the EU presidency, said: “They [Greece] need to get serious about their fiscal situation. You can’t run a 10 or 12 per cent deficit.”
Analysts also warned that the downgrade could pose problems for Greece in raising money in the bond markets and through the European Central Bank’s 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 good 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, then from the beginning of 2011, Greek sovereign bonds will no longer be eligible for ECB collateral.”
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