Soft cut from Moody’s on Greece

Moody’s became the third ratings agency yesterday to downgrade Greece’s sovereign debt rating, saying that the Greek government’s long-term credit strength was «eroding materially.» However, the lower-than-expected downgrade of Greece by just one notch sparked a bond and share rally, with senior government officials saying it was the first positive recognition of plans to cut the ballooning deficit and trim public debt. The ratings agency cut the country’s government bond ratings to A2 from A1 and gave Greece a negative outlook, adding that future decisions will hinge on the government following through with deficit-reduction plans. It was Greece’s third downgrade by a major agency this month, after Fitch took action earlier in December followed by Standard & Poor’s. The Moody’s downgrade was smaller than the two-notch drop that the markets had feared. Moody’s said Greek government steps announced last week to curb the deficit are likely to prove only partially effective but added that it sees little chance of a near-term financing crisis in Greece and that risks were long-term. «Greece’s repositioned rating of A2 balances the Greek government’s very limited short-term liquidity risks on the one hand, and its medium- to long-term solvency risks on the other,» said Sarah Carlson, Moody’s lead sovereign analyst for Greece. Shares on the Athens bourse jumped 4.48 percent in response to the news, led by banks, which soared just over 6 percent after having taken a battering recently. Concerns that local banks will not be able to use Greek government bonds as collateral for lending from the European Central Bank due to Greece’s ratings downgrades have driven the sector 16.5 percent lower in the last month. The premium that investors demand to hold 10-year Greek government bonds rather than benchmark German Bunds narrowed sharply, to 246 basis points from 280 – though it remained very high compared to most eurozone nations, which remain below 100 bps. The Finance Ministry said Moody’s decision «recognizes» that the implementation of the prime minister’s recent policy announcements paves the way for a lasting solution to the economy’s problems. «The government remains committed to implementing reforms and… intensifying efforts to restore the viability of fiscal and economic trends,» it said in a statement. Problems caused for the eurozone Greece’s debt crisis is causing problems for the entire eurozone but is a domestic issue that the government in Athens must resolve, Swedish Prime Minister Fredrik Reinfeldt said yesterday. «Of course there is a deep economic crisis,» said Reinfeldt, whose country holds the EU’s rotating presidency until the end of the year. «They have a huge problem with their public finances; they have structural problems which they had already in advance of the financial crisis and of course this could put pressure on the euro,» he told France 24 television. Meanwhile, Cypriot central bank Governor Athanasios Orphanides played down the possibility of Greece being provided with outside help, saying that the country would have to adhere to EU rules on public finances. In an interview with The Financial Times, Orphanides said: «Exactly because we have the common currency it is much more important that we adhere to the rules that we have… In my mind, there is arguably a greater risk of default on the debt of a US state than there is on the debt of a euro-area member.»

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