FINANCIAL markets around the world sold off on Tuesday after Greece's credit rating was cut amid mounting concerns about its fiscal health. European stock markets tumbled and the euro weakened sharply with investors becoming increasingly worried about dragging debt problems worldwide. The fallout also followed a ratings downgrade for six companies in Dubai, reinforcing fears of a global debt crisis.
The Fitch rating agency cut Greece's long-term debt to BBB+ from A minus. It marked the first time in 10 years that the country has seen its rating pushed below an A grade.
The agency cited “The weak credibility of fiscal institutions and the policy framework ... exacerbated by uncertainty over the prospects for a balanced and sustained economic recovery.” It said the medium-term outlook was negative.
The debt downgrade for Greece would have been in Alistair Darling's mind as he put the finishing touches to his pre-budget report.
The effect of the ratings cut was felt immediately in Greece in a week where Athens has marked the first anniversary of the police shooting of a teenager with riots and protests. Within minutes of the decision becoming public knowledge, the Greek stock exchange began to tumble, with shares falling by six per cent.
After the decision the euro slipped against the dollar and other major currencies, highlighting anxiety over the possible repercussions it could have for the eurozone if Greece defaulted on what has become the most expensive debt in the EU.
The euro fell by two per cent against the yen and by 0.6 per cent against the dollar to $1.472. The currency was also undermined by continuing worries about Dubai and a huge fall in German industrial production.
James Hughes, at CMC Markets, said “While you've got weak data coming out and doubts about Greece and Dubai, you will get fickle markets ruled by fear.”
Greece has the highest debt ratio within the 16-member eurozone with the finance minister, Giorgos Papaconstantinou, admitting that “the fiscal situation is dramatic”. Next year it is forecast to reach 124.9 per cent of gross domestic product.
The downgrade came less than a day after Standard & Poor's put Greece's debt under “negative” watch and warned of a downgrading if the country's government did not tackle overspending quickly.
The head of the European Central Bank, Jean-Claude Trichet, appealed to the prime minister, George Papandreou, to enact “courageous” measures. “The situation in Greece is very difficult,” Trichet told the European parliament's economic committee. “This calls for very difficult, very courageous but absolutely necessary measures.”
Last week the country was formally put under EU supervision. The administration, which revealed within weeks of assuming power in October that the public deficit was 12.7 per cent of GDP — more than four times the EU's permitted level — has tried to limit the damage, reassuring Brussels and investors that measures will be taken to shore up the economy.
Appearing on CNN, Papandreou rejected the prospect of Greece going bankrupt, saying it was “a responsible country” and would not default on its debt. The socialists have announced that they will curb the deficit by cutting tax evasion and trimming public expenditure.
Attending an Ecofin meeting in Brussels last week, the Greek finance minister appealed for a “suspension of disbelief” in the country's ability to attain results through tough measures and structural reforms.
— The Guardian, London
