Markets bet on Greek default as credit rating slumps again

Greece's credit rating has crashed once again and now stands on a par with Fiji and Vietnam.

Moody's Investor Services downgraded the eurozone nation's sovereign debt yesterday by three notches to B1 from Ba1, way below even troubled Ireland, Portugal or Spain. Not much more than a year ago Greece was an A1 risk, and is now firmly into "junk" territory. It suggests, once again, that international investors have little confidence in the country's ability to repay its debts, whatever new bailout mechanisms for the eurozone are eventually adopted by the heads of government summit in Hungary later this month.

Markets may also have been unnerved by suggestions from the freshly elected Irish government that it wishes to "renegotiate" the terms of its EU/IMF bailout. Greece received €110bn (£95bn) in assistance last spring. Moody's justified their move because of the "risk of a post-2013 restructuring might lead the Greek authorities and investors to participate in a voluntary distressed exchange before that time".

The credit agency also cast doubt on the ability of George Papandreou's government to deliver its austerity programme and on the Greek authorities' ability to gather taxes, a traditional weakness. "The fiscal consolidation measures and structural reforms that are needed to stabilise the country's debt metrics remain very ambitious and are subject to significant implementation risks, despite the progress that has been made to date," it said. "The country continues to face considerable difficulties with revenue collection."

Moody's explicitly raised the issue of default. "Moreover, the risk of a post-2013 restructuring might lead the Greek authorities and investors to participate in a voluntary distressed exchange before that time," it said.

With the Greek economy threatening to relapse into recession as the cuts and tax hikes make their presence felt, its ability to service a debt running towards 150 per cent of GDP at an interest rate of more than 5 per cent has been a growing danger to stability since the eurozone rescue last May.

The yield on benchmark Greek 10-year sovereign bonds is again more than 12 per cent, and went wider again yesterday, in company with Portugal and Ireland. Pressure on Portugal, in particular, has barely abated since January despite the Chinese and Japanese authorities signalling support for eurozone bond issues. The credit markets have swung once again behind the idea of a Portuguese bailout, probably of around €50bn, well within the capacity of the current European Financial Stability Facility. Spain, however, continues to represent a possibly unaffordable expense.

The Greek finance ministry said the Moody's move was "incomprehensible" and did not properly take into account the "upside impact" on the economy from the government's structural reforms programme.

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