ECONOMY

Moody’s see ‘slow death’ for Greece

Greece and Portugal face the high risk of an economic «slow death» due to their low competitiveness and high budget deficits, ratings agency Moody’s warned yesterday. While the risk of «sudden death» in the shape of a balance-of-payments crisis is negligible, the two countries «failed to shore up their competitiveness and budget positions during the good times,» and now have «structurally low competitiveness» within the eurozone, and very large current account deficits, the credit rating firm said. «This competitiveness gap is likely to result in countries bleeding economic potential and therefore tax-raising capacity if not reversed.» The result could be that a growing share of Greek and Portuguese wealth creation has to be paid to external creditors as interest on debt, especially if foreign creditors demand higher premiums to hold Greek or Portuguese government bonds. The governments would then need to increase taxes to stabilize revenue, which «may smother investment and economic potential» and encourage emigration, Moody’s said. «Over time, this chain of events would lead to a slow death of an economy within the euro area, similar to the slow death that has been experienced by many regions within individual countries,» Moody’s said. Moody’s downgraded Greece to A2 from A1 on December 22, saying the Greek government’s long-term credit strength was «eroding materially.» The agency’s outlook on Greece is also negative. The downbeat report on Greece helped push higher the premium investors demand to hold 10-year Greek government bonds rather than eurozone benchmark German Bunds to the highest since late December. The 10-year Greek government bond yielded 256 basis points over equivalent maturity eurozone benchmark German Bunds, compared with around 236 bps in late European hours the previous trading day.