Greece: Credit rating slash spooks stocks

published 11 December 2009

"Scares about government default" are the world economy's "next big problem" as The Economist pointed out. Dubai was back in the spotlight this week. And Fitch slashed its rating on Greek debt to BBB, marking the first non-A grade rating for Greece in a decade. This hammered Greek stocks and bonds, with the spread of Greek ten-year paper over its safe German equivalent jumping to its highest level since the market crisis in the spring.

What the commentators said

In October, the new government doubled its estimate of this year's budget deficit to 12.7% of GDP, the worst in the eurozone; by next year overall debt will reach a towering 125% of GDP. And Greece "seems to be nowhere near the point of signing up to austerity", said Nils Prately in The Guardian.

It's not just Greece possibly defaulting on its debts that is rattling the markets. Greek banks have been major buyers of government bonds, which they have used as collateral in tapping the European Central Bank's emergency liquidity operations. Further downgrades by other ratings agencies to less than A-status are likely to mean that government paper could no longer be used as collateral.

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Greek banks would then no longer be able to finance their assets with Greek debt, and without them the question is "who might come in to replace that demand", said Izabella Kaminska on ftalphaville.ft.com. Greece, said Capital Economics, is now "sailing very close to the wind".