This week’s Greek tragedy
This week, the single most important event in global bond markets was the S&P downgrade of Greece’s long-term debt obligations, A- to BBB+. Moody’s is the last of the major rating agencies to hold Greek debt in the A-category of investment grade (currently at A1); but a major decision from Moody’s could come within weeks. This would make Greece the lowest-rated country in the Eurozone, and the only one with 6-B status.
Since the beginning of the month, the Greek 5-Yr government bond jumped over 1% to 5% by Friday.
The chart illustrates comparable 5-yr government bonds across the Eurozone. Interestingly, the region (ex Greece) remained rather resilient to the news. However, Greece is not alone; and its growing government financing problems are in good Eurozone company.
According to the European Commission’s autumn 2009 Economic Forecast, only 5 of the 16 Eurozone countries are expected to remain below the 60% debt limits of the Treaty on European Union in 2010, while just 3 will satisfy the 3% deficit limits.The most imminent issue for Greece, with its new BBB+ status, is eligibility for ECB’s collateralized loans. In October 2008, the ECB dropped the minimum credit rating for eligible collateral on its credit facilities from A- to BBB-. However, Greece’s downgrade to the next tier of investment grade status (BBB+ by S&P) now makes it ineligible for the ECB’s credit programs if the temporary measure is repealed. Obviously, this is a problem for Greece; but it is a growing problem for the ECB as well.
I see two problems forming. First, the pressure to drop deficits and leverage will be overbearing in Europe, especially in the UK. Dropping debt levels will be important after the recovery is well underway; but before that, and a fledgling economic recovery may be cut short. Second, if investors do start to question the ability of governments to service debt (recently in Greece), financing costs in other struggling countries, like Spain, Portugal, or Italy (and some of the others circled above), could rise swiftly and pressure budgets further.
The Wall Street Journal wrote a nifty little article about the time spent trying to regain a higher rating after a downgrade occurred:
Sovereign upgrades, meanwhile, can take a long time: Greece’s rating took nine years to move one notch upward to triple-B in the 1990s; Australia lost its triple-A rating in 1986 and saw 17 years pass before it was restored.
Years, that’s how long it will likely take Greece to “implement a credible medium-term fiscal consolidation programme”. And it is very possible that Greece will see further downgrades before upgrades.
This is a problem for the ECB – it will be interesting to see the ECB push a credible exit with Greece’s credit rating squelching the expiration of the temporary collateral requirements. Fun times ahead!
Is it customary to say “drop” debt levels or rather “lower” or “reduce” debt levels? They may mean the same thing, but it is a question of English style.
I majored in Math and Economics. An editor, which I don’t have, would definitely know!
Rather than retire to Costa Rica, I am wondering if it is time to look for that Greek Villa on the ocean? http://www.viviun.com/AD-135251/ or perhaps here for the trendier: http://www.viviun.com/AD-135370/ Maybe wait for the prices to decrease a tad>?
Maybe the US shouldn’t feel so bad about its debt load just yet? What do you believe is going to happen with Greece and some of the other ones in similar situations?
The Greek economy is weak all around, as evidenced by the following: dropoff of industrial orders, meager vehicle sales, falling investment spending, near-zero growth in bank lending, rising current account deficits, not to mention the fiscal budget. This economy is still very much heading down – don’t buy just yet (not a realtor, though).
Since I wrote this article, Greek bonds were downgraded by Moody’s to the lowest A-rating – markets rebounded. The 5-yr Greek CDS fell around 8 bps (291 to 283). Man, what’s going on?
This my version of the old story.