By: Dr. Mike Campbell
Hot on the heels of wild rumours, roundly denied by all parties concerned, that Greece was on the verge of leaving the Euro, ratings Agency Standard and Poor’s has downgraded Greek bonds to junk status. Standard and Poor’s now rates the investment grade of Greek bonds at its lowest, B level. It suggested that the move was justified because it feels that Greece will have to renegotiate its debt repayments and obtain an extension (or presumably default on its obligations). Rival ratings agency, Moody’s, has said that it is currently reviewing Greece’s rating and is evaluating a further reduction.
On Friday, Jean-Claude Junkers, the chairman of the Eurozone Finance Ministers group suggested that Greece may require a “further adjusted plan” to help it deal with its on-going financial crisis. The developments were enough to cause the Euro to devalue against other major currencies and for European stock markets to trade lower.
Greek Response
Understandably, since the ratings agencies moves will make servicing of Greece’s existing debts more expensive – apart from any righteous indignation – Greece has reacted angrily. The Finance Ministry issued a statement criticising the decision: "Credit rating decisions should be based on objective data, policymakers' announcements and realistic assessments of the conditions facing an economy. Not on market rumours and press reports. When such decisions are based simply on rumours, their validity is seriously cast in doubt."
The cost of servicing Greek debt has been estimated to be 25% of the sum borrowed over a two-year time frame. The high cost of borrowing is certain to increase the strain in an already difficult situation.
In a separate development, it emerged over the weekend that Ireland may receive a reduction in the interest rate that it has to pay to the EU/IMF for its own bailout package, so it is likely that a similar accommodation may be offered to Greece at some stage.