S&P cuts Greece’s credit rating

By David Oakley in London and Kerin Hope in Athens

Published: January 14 2009 14:44 | Last updated: January 14 2009 19:16

Greece on Wednesday became the first big western European economy to have its credit ratings downgraded since the start of the financial crisis because of rising fears over its ballooning public sector debt.

Standard & Poor’s decision to cut its ratings sent Greek stocks plunging, saw the euro weaken, and heightened concerns across the eurozone over the public finances of the weaker economies as they take on record levels of debt.

Marko Mrsnik, S&P analyst, said: “The global financial and economic crisis has exacerbated an underlying loss of competitiveness in the Greek economy.”

Thomas Mayer, chief European economist at Deutsche Bank, added: “The downgrade of Greece is a wake-up call to everyone that there is a price to pay for taking on big levels of debt.”

The downgrade of Greece’s sovereign credit ratings from A, which is five notches below the top triple A rating, to A minus comes only five days after the country was put on credit watch by S&P.

It turns the spotlight on Portugal and Spain, which were put on credit watch by the agency this week, and Ireland, which was put on a negative outlook last Friday. These countries could face imminent downgrades.

On Wednesday night, the European Commission said that it never commented on ratings moves. Officials in Brussels are understood to be watching the situation with some concern, but take the view that the countries involved still appear to have their individual situations under relatively good control.

It also puts further strain on the eurozone as it celebrates its 10th birthday this month, with the bonds of Germany, the monetary union’s biggest economy, outperforming the so-called peripheral countries.

This is reflected in the widening gap in bond yields between Germany and Greece, Spain, Portugal, Ireland and Italy, which have risen to record highs since the start of the single currency in 1999.

Ken Wattret, economist at BNP Paribas, said it was “valid to say that there are question marks about the cohesion of the monetary union” with the region experiencing its worst downturn.

He said the collapse in housing prices and stock markets in some of these peripheral economies had exposed serious competitiveness problems as they no longer had the option of devaluing their way out of difficulties.

The vast amount of bonds due to be issued this year – more than €1,000bn is expected in Europe, nearly double that of last year – is also putting increasing pressure on governments as they try to issue debt.

On Wednesday, Italy was forced to pay much higher interest rates than it had bargained for to attract investors to sell five-year bonds. Last week, a German bond auction failed as it fell short of the amount of cash it had targeted to raise.

In Athens, the stock exchange plunged by more than 5 per cent on S&P’s move, with the banking sector, the bellwether of the market, hardest hit.

The sharp fall in the market also reflects concerns about political stability following last month’s street riots in Athens.

Athens has seen its current account deficit soar above 14 per cent, the highest in the eurozone, while its debt to gross domestic product ratio has risen to 94 per cent – only Italy has higher debt levels.

S&P said the country’s repeated failures to stick to budgetary plans had led to structural weaknesses in fiscal management.

The agency believed the sizeable share of social transfers, public wage bill and interest payments in public expenditure highlighted the need for reform.