Greece's Greasy Pole
12/17/2009 1:53 pm EST
This shouldn’t have come as a surprise, but apparently enough investors were still not expecting it, so that Standard & Poor’s downgrade of Greece’s credit rating has pushed down global stock markets.
On Thursday, December 17, S&P cut Greece’s credit rating one level to BBB+ from A-. This follows on the heels of a December 8 announcement that it was putting the country’s sovereign debt rating on credit watch. Fitch Ratings cut Greek debt to BBB+ that same day. S&P had lowered Greece’s debt rating to A- in January.
The downgrade leaves Greek government debt ratings at investment grade, but only three steps above junk status. It puts Greek government bonds dangerously close to losing their eligibility as collateral at the European Central Bank.
The bank currently accepts bonds rated BBB- or above as collateral for loans. The bank relaxed its lending standard to BBB- in 2008 in response to the global financial crisis. The European Central Bank has announced that it intends to revert to its old A- minimum standard for collateral in 2010.
It’s the speed at which the actual downgrade has followed the announcement of a credit watch that has unnerved markets. The aggressive action by S&P has raised worries that the Greek financial situation is deteriorating faster than bond holders had imagined—the country’s budget deficit recently climbed to 12.7% of GDP (gross domestic product), the government announced. And that has led some bond managers to believe that a downgrade to BBB could be in the cards by March.
Yield spreads between Greek and German bonds, regarded as a benchmark for safety among European issues, climbed to 2.25 percentage points, the most since April. Greek stocks were down 2% on the news.
The Greek crisis is also a euro crisis. As of Thursday morning, the US dollar had climbed to its highest level in three months against the euro and was up against the world’s 16 most-traded currencies.
The yen, another safe-haven currency, also climbed.
And it has triggered a global jog (not yet fast enough to be called “flight”) towards safety.
Following the recent pattern of if-the dollar-is-up-commodities-are-down, oil, gold, and copper all fell in morning trading.
And so did emerging markets, as lower commodity prices and the move to safety weighed on stock prices from Brazil (down 1.2%) to Hong Kong (down 1.2%) and Shanghai (down 2.3%).
It hasn’t helped that news out of the United Kingdom has also been negative today. The Office for National Statistics reported that British retail sales fell in November for the first time since May. That dropped the pound to its lowest level in two months against the US dollar.
Or that the Greek government continues to sound clueless as it announces half steps to solve its budget crisis. “We take into serious account each international evaluation,” the Greek Finance Ministry said in a statement. “However, we have our own strategy and we insist on this.”
That strategy includes what Prime Minister George Papandreou called “radical” measures, such as increasing the 2010 target for deficit reduction to four percentage points from 3.6 percentage points. That would leave the deficit at 8.7% of GDP instead of today’s 12.7%. The European Union limit is 3% of GDP.
Full disclosure: I don’t own or control shares of any stock mentioned in this post.