Moody’s today downgraded Greece’s debt by three notches down to Ba1, lower than Egypt’s. Pretty much beating a dead horse. Greece is mostly out of debt markets and will remain like that for a year or so until internal structural reforms take shape. EU periphery’s debt has thus become a mostly internal EU issue. Political rhetoric apart, EU is probably holding a tough stance to keep pressure on reforms. Greece for example has introduced all requested reforms but now has to leave time to sit in; while also increase tax revenues at least from unreported activity (Greece has high self employment rates and that’s not straightforward to tax).
EFSF’s chief Regling recently stated that Greece’s plan implementation is going well and that Portugal and Spain seem safe for now. Same point made by IMF’s European chief Antonio Borges on the back of Moody’s downgrade. There’s certainly room to maneuver when it comes to fiscal policy within the periphery, as well as ability to support from EU’s core. A default wouldn’t benefit anyone since European banks hold much of periphery’s debt. If EU wants to provide support through the EFSF or ECB, it certainly can. So this downgrade or subsequent market speculation might not make a difference. Internal reforms are policy measures that with solvency risk out of the picture, their resolution is going to drag for some time. Seems like a long trade for shorts; do they have the time for that? On the other hand seems that shorts have moved to the US$ in light of ECB’s interest rate hike.
There can be an alternative reading to this downgrade though (which by the way happened just days before EU’s leadership meeting and the day before Greece was supposed to tap into markets for a 6month T-bill issue). Could this just be another act in the clash between the EU and rating agencies? EU is skeptical of their ratings and have placed them under supervision (from the European Securities and Markets Authority) so this might be some power struggle play unfolding. Credit ratings seem to place themselves on the buyers’ side; is this some market strategy shift at least on the sovereign debt sector? Due to this timing it will also be interesting to see whether ECB will step in support Greece’s issue as probably did with Portugal.
And by the way, was anybody waiting for Moody’s to call Greece’s debt speculative just now? Following the crisis, rating agencies are under fire on all fronts. It’s only opinions they say they are expressing. Thank you, we have ours too (and as history showed any sophisticated investor should better have their own going forward too).
PS. Stay tuned for additional commentary on why fiscal policy on its own is not sufficient to take Europe’s periphery out of the crisis and why growth policies are urgently needed.