英文讀書會

Greece loses its A-rating; other rich countries are under the spotlight too

THERE are few things more embarrassing for an analyst than issuing a sell notice on a stock when the share price has already slumped. That fear of acting too late may explain why Fitch, a big credit-rating agency, chose this week to lower Greece’s sovereign-debt rating by another notch, from A- to BBB+. The firm last cut the rating in October and warned then of a further downgrade, after the new government revealed that its budget deficit this year would be 12.7% of GDP, more than twice the level previously forecast. The extra borrowing adds to a daunting stock of government debt, which the European Commission fears could rise to 135% of GDP by 2011 unless serious action is taken to cap it.

Greece intends to cut its deficit to 9.1% of GDP next year but Fitch thinks its efforts will not be enough to keep debt on a stable path. Half of next year’s budget tightening comes from one-off measures, says the agency, and this year’s red ink cannot be explained away by a mild recession or support for banks. Standard and Poor’s (S&P), another rating firm, said on December 7th (the day before Fitch acted) that it too would downgrade Greece to BBB+ unless the Greeks came up with a stricter plan to cut its debt burden. The government must submit new proposals by January to fix its finances, as part of its fiscal pact with other euro-zone countries. These will be closely watched. George Papaconstantinou, the finance minister, may set a supplementary budget for next year. He conceded that Greece’s history of inaction on fiscal problems was the source of “mistrust”.

The downgrade pushed up the interest-rate spread on ten-year Greek bonds to 2.5 percentage points over German Bunds, the safest euro-zone credit. More worrying for Greece even than the rising cost of borrowing is that it may soon find its bonds are not accepted as collateral by the European Central Bank (ECB). The ECB has since October 2008 taken bonds rated BBB- or higher as security for loans to commercial banks, as part of its emergency measures to provide liquidity to the banking system. The threshold is set to revert to A- in 2011. If by then Greece’s rating from all three main credit agencies (Moody’s is the other one) starts with a B, banks will be far less keen to buy or hold its debt.

The ECB may find itself in a tough spot, too. If it relaxes the rules for Greece, it will encourage fiscal laxity in other countries. But should it refuse to take B-rated bonds after next year, it could spell trouble for Greece and perhaps elsewhere. The Greek government faces no immediate funding troubles. The average maturity of its debt is around eight years and its gross funding requirement in 2010 should be lower than this year. Even so, with debt levels so high, Greece cannot risk losing the banks as buyers of its paper.

Greece was not the only rich country under the fiscal spotlight this week. S&P revised its outlook for Spain’s AA+-rated debt from “stable” to “negative”, a sign of a possible downgrade within two years. The agency worries that high private debt and a rigid jobs market will hold back the economy and hurt tax revenues. Even America and Britain received a raised eyebrow. Moody’s noted both might “test the boundaries” of their triple-A ratings, but were likely to survive the trial.

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The credit crisis happened one by one, and the world's economic seems to be still very fragile. So, do you guys think the world is recoving now?

This may echo Sarah's question.