– Greece Finance Minister Says No Risk of Default (Bloomberg)
– Greece to Reporters: We’re Not Dubai or Iceland (Wall Street Journal)
Here is why Greece is not Dubai or Iceland:
Greece is a member of the European Union since 1981, which makes all the difference.
The EU: ‘Only ‘EUnited’ we fail!’
ATHENS, Dec 8 (Reuters) – Ratings agency Fitch cut Greece’s debt to BBB+ on Tuesday with a negative outlook, the latest blow to the troubled euro zone country, driving its bonds, bank shares and the euro itself lower.
The cut was the first time in 10 years a major ratings agency has dropped Greece below an A grade. Fitch cited fiscal deterioration in one of the 16-member currency bloc’s most indebted member states.
“The downgrade reflects concerns over the medium-term outlook for public finances given the weak credibility of fiscal institutions and the policy framework in Greece,” Fitch said in a statement, calling for austere fiscal policies.
“The lack of substantive structural policy measures reduces confidence that medium term consolidation efforts will be aggressive enough to ensure public debt ratios are stabilised and then reduced over the next three to five years,” it said.
The euro hit a day’s low, while Bund futures hit a one-week high and Greek bank shares’ fall on the day reached almost 8 percent after the Fitch statement .FTATBNK. [nGEE5B718I]
The premium investors demand to hold 10-year Greek government bonds rather than euro zone benchmark German Bunds widened to around 230 basis points, its widest since April 21.
Markets fear Greece’s troubles will throw a harsh spotlight on other euro zone borrowers who have been hit hard by the financial crisis.
Greece’s finance minister vowed after the rating cut to do whatever was necessary to narrow the country’s budget gap. He said the downgrade reflected Greece’s lack of credibility but did not take into account its deficit reduction plans.
“We will do whatever it takes for the reduction of the deficit in the mid-term,” Finance Minister George Papaconstantinou told reporters. [ID:nATH005017]
The European Union has also told the new government it must take additional fiscal measures by January or face disciplinary action.
Greece’s socialist government, elected in October, has revealed the budget deficit was twice as big as previously reported and has pledged to bring it under 10 percent next year.
Debt would soar to more than 120 percent of GDP in 2010, it said.
Analysts said Fitch’s cut would add pressure for the government to take yet more drastic measures and expected more downgrades to follow.
“The pressure for the government to do something bolder is definitely mounting because all European institutions and rating agencies are definitely sending messages to Greece that the situation is not sustainable anymore,” Citigroup analyst Giada Giani said.
Fitch had already cut Greece to A- with a negative outlook at the end of October, after the new Socialist government revealed deficits were much bigger than previously reported.
Standard and Poor’s put Greece’s A- rating on negative watch Monday. Moody’s has placed Greece’s A1 debt rating on review for a possible cut.
Fitch said on Tuesday that further fiscal slippage could result in yet another downgrade.
Ratings guide how much it costs governments to issue bonds and other debt and are a reflection of the risks facing the country’s finances and broader economy.
Greek banks, which S&P said on Monday faced the highest risks in Western Europe, make heavy use of Greek bonds to borrow as a collateral to tap liquidity from the European Central Bank.
Before emergency liquidity measures were taken by the ECB in October 2008, A-rated bonds were the lowest the central bank would accept as collateral for lending commercial banks. It currently accepts BBB-rated paper.
Greek central banker George Provopoulos said Fitch’s downgrade would not pose funding problems for Greek banks. “There is a safety distance,” he said, adding that the banks were successfully implementing non-ECB funding plans.
For more stories on Greece’s economic woes, click on [ID:nGEE5B71HR] (Additional reporting by Harry Papachristou, Renee Maltezou, Dina Kyriakidou and Tatiana Fragou; Editing by Mike Peacock)
Tue Dec 8, 2009 9:29am EST