S&P Prepares To Cut Greece Rating For Second Time In One Year, Here Comes BBB+
Greece was placed on Creditwatch with Negative Implications by S&P, noting that the country's A- rating may be cut within 2 months. Greece CDS has widened by 11 bps to 194 on the news, and Greece now accounts for 19.7% of all SovX risk currently. In its report S&P noted:
The ratings on Greece have been placed on CreditWatch negative to
reflect our view that the fiscal consolidation plans outlined by the new
government are unlikely to secure a sustained reduction in fiscal deficits and
the public debt burden.
Without further measures,
debt will reach 125 percent of gross domestic product next year,
the highest among the 16 countries using the euro, S&P said.
In a statement that likely means that no matter what happens, Europe will be forced to bail Greece out, Jean-Claude Trichet shared the following "wisdom":
Greece is facing a “very difficult” situation and needs
to take “courageous” decisions to counter the budget deficit,
European Central Bank President Jean-Claude Trichet told the
European Parliament in Brussels today.
As it stands, and as Dubai so handily highlighted, all the risk now exclusively at the sovereign domain. Bernanke has managed to achieve a situation where bailing out Goldman et al will likely be the reason for rolling sovereign defaults in the very near future. And if the Chairman thought he was unpopular with 80% of America demanding his immediate ouster, just wait until it becomes clear to various fringe countries that Uncle Ben's policies resulted in their own sovereign defaults. We can not wait.
More from S&P:
In the absence of further measures, we project that Greece's general government debt burden could reach 125% of GDP in 2010--the largest among Eurozone sovereigns--and remain at that level, or move higher, over the medium term.
To its credit, the PASOK-led government of Prime Minister Georgios Papandreou has acknowledged the large shortfall in the 2009 budget inherited from the outgoing government, and announced reforms that could bring greater transparency to the public finances in the future. After taking office in October, it raised the estimate for this year's general government deficit to 12.7% of GDP, more than six percentage points higher than previous official projections. Also, the new government has outlined plans to establish
independent budget accounting and statistical offices to bring greater credibility to the budget making and budget execution process. These steps are important, in our view, given that the usefulness of the previous fiscal management framework had been undermined by repeated misreporting of fiscal deficits by previous administrations. That said, it will take time for these new institutions to establish an effective track record.
We consider the new government's strategy for fiscal consolidation, however, to be more tentative. It has announced plans to cut the 2010 budget deficit by 3.6 percentage points of GDP (to 9.1% of GDP), some of which represent one-off measures. On the revenue side, property taxes, as well as income taxes on higher-earning individuals and large companies, are set to increase. On the spending side, a partial freeze on public sector wages and pensions has been targeted, together with a phase-out of public sector workers on short-term working contracts. We view these measures as unlikely by themselves to alter Greece's medium-term fiscal dynamics, given the high fiscal deficits and debt burden the government inherited but also, in our opinion, unfavorable demographics and weak economic growth prospects.
We expect to resolve the CreditWatch placement within the next two months, after we receive further information from the Greek authorities on their plans to counter intensifying economic and fiscal pressures. If we conclude that the government's strategy is aggressive enough to secure a significant and sustained decline in the public debt burden, the ratings could be affirmed. Conversely, we could downgrade the rating by one notch to 'BBB+' if we view the government's fiscal assumptions as unrealistic, particularly given the risk that the Greek economy may underperform many of its Eurozone peers over the medium term.