Credit rating agency Standard & Poor’s yesterday announced that it has lowered its long-term sovereign credit rating on Greece to A from A+. The short-term rating remained unchanged at A-1.
Despite the downgrade, the bond market showed little movement yesterday.
The downgrade was expected since S&P announced on September 13 that it had assigned a negative outlook to the rating. The warning came a day after the government had announced revised budget deficit figures for the years 2000-2003.
The upward revision of the deficit undertaken by the government, mainly by following a different methodology for calculating expenditures and revenues, led to an investigation by the European Union into the budgets immediately preceding Greece’s acceptance into the eurozone in June 2000. The conclusion was that, following the government’s methodology, Greece had posted excessive budget deficits that, had they been known at the time, would have precluded Greek entry into the eurozone.
In announcing the downgrade, S&P criticized the government for doing little to remedy the country’s fiscal situation. “At [the time of the negative outlook warning], Standard & Poor’s stated that failure to address the increased fiscal imbalances with lasting structural measures would lead to a lowering of the ratings. The 2005 draft state budget, submitted to Parliament on October 4, 2004 does not contain these structural reforms, and no significant fiscal policy measures are in the pipeline,” the agency said in a statement yesterday.
“The government intends to reduce its deficit to less than 3 percent of GDP in 2005, but this will be difficult to attain without additional measures or increased recourse to one-off transactions,” said Standard & Poor’s credit analyst Trevor Cullinan.
Economy and Finance Minister Giorgos Alogoskoufis has steadfastly insisted the budget deficit cut will be attained without recourse to austerity policies, which he has termed outdated. His stance reflects the government’s unwillingness to implement unpopular measures but also a concern that such measures would have a negative impact on economic growth, which has been much higher than the EU average.
According to the government’s projections made back in September, the 2004 deficit will equal 5.3 percent of GDP, although revenue shortages are already pointing to a bigger deficits. According to Cullinan, “the general government deficit is expected to reach 5.5 percent of GDP this year, with the cyclically adjusted balance at almost 6.0 percent of GDP.” As for the country’s debt: “[It] is forecast to be at 112.0 percent of GDP by the end of 2004, little changed from 114.0 percent on the eve of Greece’s EMU entry in 2000,” he said.
“The ratings could be raised if structural budgetary improvements were to lead to a clearly discernible trend toward the primary surpluses of the late-1990s (about 6 percent of GDP) and the public debt ratio was to embark on a speedy and sustained decline. Conversely, an increase in the general government debt ratio would bring the ratings under renewed downward pressure,” S&P concluded.
By late afternoon yesterday, the benchmark 10-year Greek Treasury bonds had increased their yields by 2.6 basis points (0.026 percent) and their spread over German Bunds remained unchanged at 17 basis points.
“This was as expected,” said Nathalie Fillet, senior interest rate strategist at BNP Paribas in London.
(Kathimerini, Reuters)