Higher Risk in Greek Debt

(08.03.2011) Moody's downgraded Greek government debt, but markets reactions were limited.

By Kyrre Aamdal, Senior Economist at DNB Markets

illustration DNB markets dealingroom in osloYesterday morning Moody's Investorservice reported it had downgraded Greece’s government bonds to B1 from Ba1, placing the debt on negative outlook, meaning further downgrades are likely. The move takes Greek debt from borderline junk to “highly speculative” territory. The downgrading is based on three main arguments: first there is a high risk that the Greek government fails to complete the austerity measures and structural changes necessary to stabilise government debt. Second, budget revenues increase too slowly, probably due to non-efficient tax system. Third, there is a substantial risk that the Greek government will be unable to meet the demand for further reforms to receive financial support after 2013.

According to Financial Times the Greek government reacted angrily, saying the downgrade was "completely unjustified". Moody’s had focused "exclusively on the downside risks" while ignoring recent progress with fiscal consolidation, it said. "Decisions such as Moody’s today can initiate damaging self-fulfilling prophecies". Fitch and S&P still rate Greek debt three notches higher at BB+ (the equivalent of Ba1, Moody’s previous rating), but this might not last long. Fitch last downgraded on January 14 and has a negative outlook on the rating, while S&P last downgraded in December but has the rating on credit watch negative (meaning a downgrade is imminent, if there is no material improvement). The downgrading contributed to increase the CDS premiums on Greek government debt, with a 47 bps increase for 5y Greek debt. The increased premiums spread partly to Portuguese debt, with CDSs up 8 bps.

The EUR traded yesterday morning above 1.40 EURUSD, but fell back almost one cent. During the night the EUR strengthened again, and trades this morning at roughly 1.3950 EURUSD, roughly unchanged from early yesterday morning. The downgrading from Moody's has thus not given substantial or lasting effects on the Euro. Probably has the market to a large extent expected a downgrading. Credit reviews are typically three months long, meaning we should hear from Moody’s on Spain before March 15, and Portugal before March 21.

Yesterday morning one British Pound cost less then 9 Norwegian Kroner for the first time since May 14 last year. Versus the EUR the NOK has held its relatively strong level around 7.77 EURNOK the last 24 hours. In Europe the stock markets were volatile. Weak Asian markets contributed to a weak opening, but major indices strengthened towards the opening in the US. A bit after the US opening, the US technology sector declined, and contributed to losses also in Europe, with FTSE100 down 0.3 per cent and Eurostoxx50 down 0.6 per cent. This morning Brent crude is down 1.1 per cent to $113.75, nearly $5 off Monday’s high, after Kuwait said it was in talks with other OPEC members to boost production in order to make up lost supply out of Libya, where the fighting continues. Together with positive developments in Asia European stock markets opened with a small increase.

There were few interesting key economic figures yesterday, but statistics Norway released Norwegian manufacturing production figures for January. Production increased 0.6 per cent from December, a bit below consensus expectation of 1 per cent. Production is on a modestly increasing trend, but the January level is still below the level of July 2010. Output in machinery and equipment and basic chemicals went up by 2.9 and 2.0 per cent respectively, while there was a 1.3 per cent growth in computer and electrical equipment. Output in wood and wood products and ships, boats and oil platforms went down by 9.1 and 3.6 per cent during this period.

Tomorrow more important February inflation figures will be released. This will be the last major key figure before Norges Bank finalizes its work with the new interest rat path, which will be published in the next Monetary Policy Report on March 16.