ECONOMY

S&P puts Greece on credit watch

Greece may have its credit rating cut for the second time this year by agency Standard & Poor’s (S&P) on concerns that the government is not doing enough to improve its finances. The country’s A- long-term sovereign rating was placed on «credit watch with negative implications,» the company said yesterday, signaling that the classification may be lowered within two months. «The ratings on Greece have been placed on credit watch negative to reflect our view that the fiscal consolidation plans outlined by the new government are unlikely to secure a sustained reduction in fiscal deficits and the public debt burden,» S&P analyst Marko Mrsnik said. Without further measures, debt will reach 125 percent of gross domestic product next year, the highest among the 16 countries using the euro, S&P said. News of the likely credit cut resulted in the premium investors’ demand to hold 10-year Greek government bonds rather than eurozone benchmark German Bunds rising above 200 basis points. The yield spread, which had already been under pressure earlier in the day on worries about Greece’s economic fundamentals, hit its widest in a week at 201 basis points, compared with around 174 bps late on Friday. The cost of insuring against a default on Greek sovereign debt rose to 185,700 euros per 10 million of exposure from 181,600 euros in New York trading on Friday, according to credit default swap prices from CMA DataVision. Experts described the market reaction to S&P’s decision as being excessive given recent bond price movements. «Greece’s fiscal or budgetary problems were widely publicized, a ratings downgrade is likely at some point so I’m surprised at the extent of the market reaction,» Everett Brown, a bond strategist at Ideaglobal, told Reuters. «Greece is still very far from an actual potential default and the news we are getting on the ratings is quite expected and should be well discounted by the current spreads.» The government plans to cut the budget deficit to 9.1 percent of GDP next year from 12.7 percent this year. The plans, including one-off measures and a partial freeze on public sector pay, «are unlikely in themselves to alter Greece’s medium-term fiscal dynamics,» given the prospect of high deficits, debt and sluggish economic growth, S&P said. Greece’s sovereign credit rating was lowered one level to A- by S&P in January.The agency also put Portugal’s sovereign ratings on negative watch, citing its recent fiscal woes. ‘Courageous’ steps needed European Central Bank (ECB) President Jean-Claude Trichet underlined his confidence in the Greek government yesterday, but added that the country needs to implement «very courageous» measures to tackle the debt situation. «The situation in Greece is very difficult,» Trichet told the European Parliament’s economic committee shortly before Standard & Poor’s put its outlook for Greece’s credit rating on negative watch. «So this calls for very difficult, very courageous but absolutely necessary measures. I am confident that the government of Greece will… take the appropriate measures,» Trichet said. Greece has seen a spike in the cost of selling bonds compared to other countries that use the euro currency, reflecting investor concern over the government’s ballooning budget deficit and mounting public debt. Meanwhile, German news magazine Der Spiegel reported that Greece’s ballooning budget deficit and mounting public debt would be discussed at a December 17 ECB Governing Council meeting.