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March 7, 2011

Greece credit rating gets downgraded by Moodys

AP report by Pan Pylas on the squabble between the Greek government and Moodys over credit rating adjustments which have driven down the Greek rating:

"Greece launched a tirade against credit ratings agencies Monday after Moody's downgraded its debt grade further below junk status, warning the bailed-out euro country might have to default on its massive borrowings.

The agency slashed its rating by three notches to B1 from Ba1 and warned it may cut again if the government's commitment to austerity wanes or international creditors become less willing to support it ...

The Greek government's response was quick and critical. It said Moody's downgrade was "completely unjustified" and "does not reflect an objective and balanced assessment" of Greece's actual economic prospects.

"Ultimately, Moody's downgrading of Greece's debt reveals more about the misaligned incentives and the lack of accountability of credit rating agencies than the genuine state or prospects of the Greek economy," the finance ministry said."

"...It said Moody's failed to properly take into account the positive impact from the austerity measures and structural reforms.

"At a time when the global economy is fragile and market sentiment is sensitive, unbalanced and unjustified rating decisions such as Moody's today can initiate damaging self-fulfilling prophecies and certainly strengthen the arguments for tighter regulation of the rating agencies themselves," it added.

...At the moment, it's effectively blocked [Greece] from issuing longer-term debt because of the exorbitantly high costs involved. The interest rates markets are charging Greece to lend money for ten years is over 12 percent, nearly 9 percentage points more than what Germany has to pay even though they share a currency.

Despite the body blow delivered to the Greek government, the euro continued to climb in value over the dollar in currency markets.

A blog at Barron's by Avi Salzman conceptualized the Moody downgrade as an inevitable slide into junk bond status because Greek society refuses to back the Papandreau austerity plan, and the 2013 window of eurozone support will come to an end:

"Moody’s announced it was dropping Greece’s rating to B1 from Ba1, and gave the rating a negative outlook on fears that the country’s plans to fix its finances are too ambitious and “are subject to significant implementation risks.” Moody’s said that Greece is still having trouble raising revenue — the country has had trouble getting taxpayers to pay their fair share.

Moody’s also said that Greece may lose its safety net in 2013 as it fails to meet the conditions attached to “official support.”

Meanwhile the IMF was quick to say it still has plenty of confidence that Greece can work its way through the austerity plan. Wall Street Journal writers Natasha Brereto and Alkman Granitsas report:

"...while the head of the International Monetary Fund's European department said the IMF is confident its emergency bailout program for Greece will succeed despite the downgrade.

The ratings agency downgraded Greece to B1 from Ba1, and kept its outlook negative. Standard & Poor's and Fitch Ratings both rate the country slightly higher at double-B-plus, with a negative outlook.

Moody's acknowledged progress that Greece has made in fiscal consolidation and structural reforms but warned that the changes needed to stabilize Greece's debts remain "very ambitious" and face "significant implementation risks."

"Implementation Risks" means there's an a lot of doubt about the Greek people backing the fulfillment of the austerity program all the way through to the end. "Refuse to pay" movements and other expressions in Athens of mild revolt is having an effect elsewhere with observers:

"...European Union leaders are due to meet at the end of March to decide on a future permanent bailout mechanism for the euro zone, to replace a temporary fund that was cobbled together last year after Greece's debt crisis threatened the stability of the euro zone."

Apparently, the IMF/eurozone plan will have to be modified if it is going to bypass the opposition of the Greek society which is combating the stage-managed economic contraction every inch of the way.

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