By: Mike Kulej
Couple of weeks after Dubai scare, concerns over credit worthiness of other small countries are spreading. Greece, which had been on a hot seat for some time over its fiscal policies, just had its sovereign credit downgraded. The rating on countries government bonds was cut by Fitch Ratings to BBB+ and the two other major ratings companies are threatening to follow suit. It is after Greek government raised its 2009 budget-deficit estimate to 12.7% of gross domestic product after Oct. 4 elections, three times higher than an earlier forecast and more than four times the 3% allowed under the European Union’s Stability and Growth Pact. This could have long term implications on economy, raising costs of borrowing and slowing down recovery.
Greece has about a year to get its fiscal state in better shape or its banks will have hard time getting new capital. European Central Bank currently accepts bonds rated BBB- as collateral for loans after relaxing its rules in response to the financial crisis last year. At the end of 2010, it is due to revert to the old rules, under which A- is the minimum required rating. As of right now Greek bonds still meet the standards, but that not might be the case next year at this time. In reality, though, it is very unlikely that ECB would turn its back on one of the member states, as long as situation doesn’t repeat with other countries across the continent.
Surprisingly, rating agencies don’t say much about risks of other countries, where situation is worse than Greece. Japanese debt is far bigger, yet there is no talk about downgrading their bonds. Ditto for US. Well, I’m sure this is politically driven, trying to convey illusion that “safe havens” are still around. Currencies largely shrugged off the news, with not much of a reaction. After couple days of directional news, it was time to consolidate before next move can take place. Nothing unusual, and even anticipated, given the fact that tomorrow two major central banks hold policy meetings- in Great Britain and Switzerland.
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