ECONOMY

EU surprised by Moody’s move

Jean-Claude Juncker, head of the Eurogroup of finance ministers, criticized rating agency Moody’s yesterday for its «irrational» downgrade of Greece’s debt to «junk» status in a move that has seen borrowing costs for the Greek government and lenders jump anew. «I don’t understand why this further downgrading did intervene,» Juncker, who is also prime minister of Luxembourg, told reporters following a seminar on the European Union in Oslo. Late on Monday, the US-based rating agency slashed its debt rating for Greece by four notches from A3 to Ba1, saying that even with the help of an EU-IMF bailout package there was considerable uncertainty about whether Greece would reduce its huge debt and balance its finances. The downgrade means some investors will no longer be allowed to buy Greek debt under the terms of their investment mandate and could lead to still higher borrowing costs for Athens if it goes to the markets for cash. «I am totally convinced that… a few months from now, the financial markets will see that they were wrong. They’re misinterpreting the decisions which have been taken,» Juncker insisted. He underlined that Greece had submitted to «strict» measures to put its public finances in order to receive the EU-IMF bailout package. «These downgradings of rating are not in each and every case understandable and rational,» he said, adding, «Personally, I think that financial markets are behaving sometimes in a very irrational way.» Juncker added that the EU’s fundamentals were «far better than those of the US and Japan» but that the eurozone was the the target of financial markets because of its inability to «at least narrow imbalances» between EU countries. Olli Rehn, the EU’s top economic commissioner, told the European Parliament earlier yesterday that the action by Moody’s was «surprising and highly unfortunate» and said it raised questions about the role of rating agencies in the financial system. Standard & Poor’s in April also downgraded Greece’s sovereign debt to junk status, while Fitch, the other major international rating agency, warned in late May that it might also cut the country to the same level. Following Moody’s decision, Greek government bonds will attract an extra 5 percent penalty when banks use them as security for European Central Bank funds, according to an ECB spokesman. The extra «haircut» means commercial banks will receive less money in exchange for Greek bonds than they would if they used government bonds from any other eurozone nation. «A haircut will be applied, it will be an extra 5 percent,» an ECB spokesman said. The ECB has a sliding scale for assessing the riskiness of assets, with sovereign bonds at one end and asset-backed securities at the other. The Moody’s downgrade to Ba1 late on Monday means all three rating agencies now assign Greek debt a credit rating in or below BBB territory, the threshold for the extra haircut. Indices drop Greek paper Greek government bonds will be dropped from several leading global indices following Moody’s downgrade, increasing selling pressure on the assets. Citigroup is preparing to remove Greek government debt from its World Government Bond Index, a key benchmark for sovereign credit, in a decision expected at the end of the month. «Greece no longer meets the minimum credit criteria of BBB-/Baa3 by either S&P or Moody’s for the World Government Bond Index,» according to Citigroup. Greek bonds will also be removed from Barclays Global Aggregate and Global Treasury indices. Investors who have a mandate to track an index in their funds may be forced to sell an asset when it is removed from the gauge. Meanwhile, Greek government bonds led a decline of peripheral euro-region debt including Portugal and Spain yesterday after the downgrade. Investors demanded an extra 6.08 percentage points, or 608 basis points, to hold 10-year Greek securities instead of benchmark German Bunds, the most since May 10, when the European Central Bank began buying the debt of some nations in the region.