GREECE SUFFERED the indignity of a credit downgrade to 'junk' status as rising anxiety over the parameters of the EU/IMF rescue of the country drove down markets in Europe and the US.
Talks on a three-year package of austerity measures continued in Athens yesterday amid rising fears that the Greek crisis could contaminate the debt of other weak euro members.
While Greece capitulated to market pressure last Friday and sought to activate the rescue mechanism, the period since then has been dominated by politicking over the scope of the rescue effort. This follows months of talks between the European authorities and member states.
Signals from the European Commission that EU and IMF officials would finalise the plan by “early May” did little to ease the fraught atmosphere on markets yesterday. The authorities are now under rising pressure to deliver a deal quickly.
The plan is tied to a €45 billion loan package from euro countries and the IMF, a package the markets fear may not be big enough to avert the threat of a Greek default.
Greece could ultimately need €80 billion over the course of the three-year rescue and faces rising pressure to contain the financing costs on its existing debt mountain of €300 billion. The country’s two-year government bond yield reached close to 15 per cent yesterday.
With Germany still insisting on draconian cuts from Athens, the renewed volatility is likely to hasten efforts to settle the package. Investors are unsettled by a looming regional election in Germany on May 9th, which is seen to be a big factor in Berlin’s lukewarm support for the rescue.
The renewed turmoil was fanned by an unsparing downgrade from Standard & Poor’s (S&P). The rating agency maintained a negative outlook as it cut its grading of Greek debt by three levels to BB-plus, its first speculative grade.
S&P pointed to the “political, economic, and budgetary challenges that the Greek government faces in its efforts to put the public debt burden on to a sustained downward trajectory”.
Speaking before the downgrade, Deutsche Bank chief economist Thomas Mayer said Greece has entered “a death spiral of government insolvency”.
S&P also cut its rating of Portuguese debt by two notches to A-minus, saying the country must do more to stabilise its finances. Two-year Portuguese government bond yields climbed to 5.23 per cent from 4.16 per cent, and the cost of insuring its debt against default rose to a record high.
Amid mixed signals over the prospect of Greece’s debt being restructured, US oil futures dropped 2 per cent and the euro fell close to a one-year low against the dollar. Shares in Greek banks lost more than 9 per cent.
While the commission and the Greek government insist there is no prospect of its debt being restructured as part of the rescue, a spokesman for Germany’s Christian Democrats said they would raise the possibility of a debt discount in talks today with the IMF and the European Central Bank.
