S&P lowers Greek debt rating

Standard & Poor’s (S&P) cut its credit ratings on Greece’s sovereign debt yesterday due to a rising fiscal deficit and worsening outlook amid the global economic turbulence. S&P cut Greece’s sovereign rating, already the lowest in the 16-nation eurozone, to A-/A-2 with a stable outlook from A-/A-1, citing the government’s repeated failure to pare back its fiscal deficit despite years of solid economic growth. Greece was one of four eurozone countries warned by S&P in recent days of a possible ratings cut as the credit crunch and rising unemployment worsened their economic outlook. Ireland, Spain and Portugal were the other countries to be warned. «The ongoing global financial and economic crisis has in our opinion exacerbated an underlying loss of competitiveness in the Greek economy,» S&P credit analyst Marko Mrsnik said. «The ongoing slowdown in credit growth will likely lead to a deceleration in domestic demand, thus increasing the risk of a recession and a possibly protracted adjustment.» S&P, which only put Greece on credit watch on Friday, said the country was entering the downturn with a fiscal deficit of around 3.5 percent of gross domestic product (GDP), after repeated government failures to reduce a hefty public sector wage and pension bill. It forecast Greece’s public deficit would rise to over 4 percent of GDP this year – double the government’s budget forecast – and was unlikely to improve significantly before 2012 unless policies were overhauled. Greek bonds erased gains after the decision, with the yield on the benchmark 10-year note rising two basis points to 5.38 percent. Local stocks also fell almost 5.5 percent, the most in more than two months. The head of Greece’s debt management agency, Spyros Papanicolaou, said the downgrade was not expected to have a major impact on spread or demand for Greek debt. «Standards & Poor’s downgrade was expected as the global crisis hits the eurozone periphery especially hard,» Papanicolaou told Reuters. «I believe that it will not have a major impact on spreads or demand for Greek debt.» In response to the news, recently appointed National Economy and Finance Minister Yiannis Papathanassiou said Greece remains committed to reducing the budget deficit to below 3 percent of GDP. «This will happen in accordance with our plan and without ignoring under any circumstances the need for social cohesion,» said the minister. Action by agency has been discounted Investors should buy 15- and 30-year Greek bonds versus Italian securities, according to Wilson Chin, a fixed-income strategist in Amsterdam at ING Groep NV. «Spreads between Italy and Greece are at extreme levels,» Chin wrote in a note yesterday. «The long end of the Greek curve continues to offer value despite the recent rating changes, as we believe the supply story from Greece is a positive one and because we believe the rating change has been discounted already in the recent cheapening of Greek issues.» Greece may sell about 25 billion euros ($33 billion) of bonds this year, down from 34 billion euros in 2008, Chin wrote. The nation had its long-term credit rating cut yesterday one step to A- by Standard & Poor’s, which cited the economy’s «loss of competitiveness» amid the global financial turmoil. The difference in yields, or spread, between benchmark Italian 2023 bonds and Greek securities of similar maturity was 107 basis points yesterday, up from 43 basis points on December 10. (Bloomberg)

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