Greece Downgraded - Again

Neither Bank of England nor ECB chose to hike at yesterday's monetary policy meetings. Trichet lived

(14.06.2011) From our previous report Friday morning, the Euro has declined 0.4 per cent versus the US Dollar and 1 per cent versus GBP. The NOK is quoted at 7.81 EURNOK – 0.6 per cent stronger than Friday morning. The US stock market ended up flat yesterday and Japan's stock market was up this night.

By Kyrre Aamdal, Senior Economist at DNB Markets

Yesterday Standards & Poors's rating agency downgraded Greece's long term debt to CCC, down from B, and holds a negative outlook. Greece thus became the lowest rated country in the world according to S&P. S&P said Greece is “increasingly likely” to face a debt restructuring and the first sovereign default in the euro area’s history.

The move to CCC from B reflects “our view that there is a significantly higher likelihood of one or more defaults,” S&P said in a statement yesterday. “Risks for the implementation of Greece’s EU/IMF borrowing program are rising, given Greece’s increased financing needs and ongoing internal political disagreements surrounding the policy conditions required.”

Greece’s government, which plans to sell 1.25 billion euros ($1.8 billion) of 26-week Treasury bills today, said that the downgrade overlooked “intense” talks between European officials to address the nation’s financing needs. Credit default swaps on Greece, Ireland and Portugal surged to records yesterday on concern governments’ struggles to resolve the turmoil will threaten their ability to pay their debts. 5y CDS for Greek sovereign debt reached 16 per cent yesterday, more than twice the level of Portugal.
 
This week several European states are entering the loan markets. Germany will borrow EUR 6bn, France EUR 8.5-10bn, while Spain, Italy and the Netherlands will borrow EUR 2-3bn each. Greece will borrow EUR 1.25bn today as mentioned above and Portugal will also do some short-term borrowing this week. Also EFSF, the European rescue fund, is entering the market this week to borrow EUR 5bn. The turmoil surrounding Greece may affect all of the peripheral European countries, while the weakening economic prospects and recently declining stock markets may bring down the yields for the high rated European states.  
 
China’s inflation accelerated to 5.5 per cent in May, the fastest pace in almost three years, and industrial output grew slightly more than economists forecast. The inflation figures were in line with expectations. Production rose 13.3 percent last month, the statistics bureau said in Beijing today. That compared with a median 13.1 percent forecast. The Shanghai Composite Index climbed on signs that the economy is maintaining momentum even after interest-rate increases and real-estate curbs. Higher inflation and strong growth increases the likelihood for more policy tightening.
 
Friday Statistics Norway release Norwegian May inflation figures. Core inflation (CPI–ATE) become 1.0 per cent y/y in May, down from 1.3 per cent in April. This was almost as expected by consensus (1.1 per cent and Norges Bank (0.9 per cent). The main factor behind the decline was a price drop in airline fares. Airline fares rose significantly in April due to the Easter break. Prices on clothing and books also declined this month. After being on a downward trend, food prices rose by 0.5 per cent in May.  

CPI rose by 1.6 per cent in May, up from 1.3 per cent in April. This was as expected by consensus, but somewhat higher than Norges Bank's estimates (1.2 per cent). CPIXE, Norges Banks own calculated core inflation measure, become 1.2 per cent in May, slightly above Norges Bank's forecast. After an high outcome in April, inflation has declined and the total impression is of a relatively stable development. On average the development is slightly above Norges Banks projections from the March Monetary Policy Report. There were no major market reactions.