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Greek 'junk' rating

June 15, 2010

The European Union's top economic commissioner Olli Rehn has criticised Moody's rating agency for downgrading Greece's debt rating as the Athens government struggles to solve the country's huge national debt.

A car scrapyard
Moody's junk rating comes at a bad time for GreeceImage: AP

The European Union Commissioner for Economic Affairs, Olli Rehn, has criticized the US-based rating agency Moody's for slashing its sovereign debt rating for Greece to "junk" status.

Speaking during a debate in the European parliament in Strasbourg, Rehn said that the decision to cut Greece's rating was both "surprising" and "unfortunate" at a time when EU and IMF auditors were taking a hard look at the country's attempts to slash its debt.

The EU Commissioner said that the downgrade, which he had discussed with financial services commissioner Michel Barnier and European Commission president Jose Manuel Barroso, "again raises issues related to the role of credit rating agencies in the financial system."

European Commissioner for Economic Affairs Olli Rehn speaks during a media conference at an emergency meeting of EU finance ministers in Brussels, Sunday, May 9, 2010. EU finance ministers meet in Brussels Sunday to discuss establishing a new
Olli Rehn says the credit rating industry needs a shake-upImage: AP

Rehn said that the EU commission, which is seeking to regulate ratings agencies under new reforms due to be implemented in 2011, will probe "the level of competition in the sector" and fears that a lack of transparency could represent a "conflict of interest."

Not everyone surprised

But many financial experts say the downgrade by Moody's was not totally unexpected given that rival ratings agency Standard and Poor's downgraded Greece's sovereign debt to junk status in April, while Fitch, the other major ratings agency, warned weeks later that it, too, may follow.

"Nothing has really changed since then," said Alcidi Cinzia, a research fellow at the Centre for European Policy Studies (CEPS) in Brussels. "The agency has just put down on paper what the market has been thinking for some time," she told Deutsche Welle.

Questionable creditworthiness

In a statement issued Monday, Moody's justified its decision to lower Greece's creditworthiness rating by four notches from A3 to Ba1 by pointing to considerable market uncertainty surrounding the country's plans to reduce its huge debt and balance its finances – even with the help of the EU-IMF bailout package. Moody's describes the Ba1 rating as below investment grade - or "junk" status in market parlance.

Prime Minister George Papandreou speaks to the press
Prime Minister George Papandreou has been facing some tough questionsImage: AP

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.

Observers agree that the downgrade is yet another blow to the debt-ridden country, which is under intense international scrutiny. Last month, it narrowly avoided default after the European Union and the International Monetary Fund (IMF) agreed to intervene with a 110 billion euro ($130 billion) bailout.

The bailout from the EU and the IMF means that Greece is highly unlikely to default in the short term, if at all. And it gives the country a few years to get its fiscal act together.

Cut spending, promote growth

But the bailout is a loan - not a gift - meaning that it adds to Greece's debt. To climb out of trouble, the country will need to cut spending and, at the same time, grow its economy. While experts agree this will be a difficult trick to pull off, the Greek government has been trying hard to promote confidence in its plans.

Greek protesters on the streets in Athens
Greeks protest the government's sweeping austerity programImage: AP

So, understandably, officials in Athens weren't happy with Moody's call, especially its timing. Shortly after the ratings agency released its statement, the Greek Ministry of Finance fired off it own.

"Moody's downgrade of Greek government bonds today does not reflect in any way Greece's progress over the past months," the ministry wrote. "Nor does it reflect the potential created by the country's effort of fiscal consolidation and increased competitiveness."

"Greece is moving ahead with all the reforms stipulated in the Memorandum of Understanding, (and) for many of these reforms, it is already ahead of schedule."

Author: John Blau & Nigel Tandy
Editor: Sam Edmonds

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