who’s the daddy now

December 12, 2009

CDS spreads: Greece v Turkey

CDS spreads: Western Europe

The downgrade is not as significant this year, but will be of paramount issue in 12 months, as Greek bonds will not fulfill the requirements for collateral with the ECB. The Greek government says that this will not be an issue, presumably meaning that in a year’s time the rating will be back to the ‘A’ group. But how likely is that to happen?

Standard and Poor’s publish an
annual study on defaults and transitions, which could be used to shed some light. This is based on the historical experience, and I would think that the current conditions are significantly worse than the historical average, so I would personally penalize the figures downwards.

SP say that there is a 13% chance that a BBB+ country moves to A- or above within a year (table 14). This is a historical average figure, and as I mentioned before, could well overestimate the chances of Greece getting back on the As. Much of the sample is from the booming 90s, and assuming the same dynamics today will be misleading.

Incidentally, these probabilities would have been double (table 6), if Greece were out of the Euro zone, as a currency devaluation would have been an option. But this is perhaps academic, as Greece might have had defaulted many years ago if it were not for the security that the Euro offered investors.

Perhaps more crucially, the above statistics include countries that pass through BBB+ on their way up, as well as countries that are on their way down. It is important then to see what is the historical experience of countries that bounced back (table 8). From 141 downgrades, 57 were followed by another (or more) downgrade within two years, 36 remained the same, while only 7 bounced back.

I read this as evidence that the chances of a rebound in such a short space is slim. The Minister appears to have a different opinion.

The following article gives more details. Further down is the interview of Papaconstantinou with the CNN.

Wire: BLOOMBERG News (BN) Date: Dec 9 2009 10:07:10

Greece Downgrades May Hinder Banks Seeking ECB Loans
(Update1) (Adds bond spread widening further, in seventh paragraph.)

By Jana Randow and Frances Robinson

Dec. 9 (Bloomberg) — Greek government bonds may not be eligible as collateral at the European Central Bank if the ECB reverts to pre-crisis rules in 2011, making it more difficult for Greece to borrow money. The credit rating on Greece’s government bonds was yesterday cut by Fitch Ratings to BBB+ and the two other major ratings companies are threatening to follow suit. The ECB currently accepts bonds rated BBB- as collateral for loans after relaxing its rules in response to the financial crisis last year. At the end of 2010, it is due to revert to the old rules, under which A- is the minimum required rating.

“The banks are currently able to pledge bonds issued by their government as collateral at the ECB,” said Ben May, an economist at Capital Economics Ltd. in London. “This will no longer be an option come the end of next year if the other rating agencies follow Fitch’s lead.”

Standard & Poor’s on Dec. 7 put its A- rating on watch for a possible downgrade, signaling it may be reduced within two months. Moody’s Investors Service lowered its outlook on Greece’s A1 rating to “negative” on Oct. 29. Greek stocks and government bonds tumbled yesterday on mounting concern the nation may struggle to meet its debt commitments as public finances deteriorate.

The government raised its 2009 budget-deficit estimate to 12.7 percent of gross domestic product after Oct. 4 elections, three times higher than an earlier forecast and more than four times the 3 percent allowed under the European Union’s Stability and Growth Pact.

‘Stronger Commitment’

“The Greek government will need to demonstrate a stronger commitment to consolidating the fiscal position,” said Laurent Bilke, an economist at Nomura in London. “The Greek economy is already paying a high price given that spreads have widened leading to a high cost of borrowing, and this would get worse.”

The spread between the Greek and German 10-year benchmark bonds widened to 246 basis points today from 130 basis points on Oct. 5. That compares to 25 basis points for Finnish 10-year bonds. Credit-default swaps on five-year government bonds rose to 191 basis points on Dec. 7 from 124 on Oct. 5. That’s the highest in the euro region, followed by Ireland at 153 basis points.

“There’s certainly an element of panic and hysteria,” said Peter Dixon, an economist at Commerzbank AG in London. “The ECB will bend over backwards to ensure that one of the countries within its orbit doesn’t default. There will be a lot of arm-twisting and deals done behind the scenes should it come to it.”

ECB Meeting

ECB Vice President Lucas Papademos met with Greek Prime Minister George Papandreou and Finance Minister George Papaconstantinou last month to discuss the risks facing the Greek economy.

Greece, the lowest-rated country in the euro region, is struggling to shore up its finances amid a year-long recession. The European Commission expects the economy to contract 1.1 percent this year and 0.3 percent next year, before growing 0.7 percent in 2011.

“The government is proceeding with a plan,” Papaconstantinou told reporters in Athens yesterday. “We will do all that’s needed to bring the deficit down in the medium-term. We will submit a supplementary budget if needed.” Greece is committed to a “fair” fiscal consolidation, he said.

Greece has about 700 billion euros of debt outstanding, of which 47 billion is currently used as collateral at the ECB, according to Royal Bank of Scotland Group Plc. If banks were no longer able to use their country’s bonds to refinance at the ECB, demand for them would wane and the government’s borrowing costs would increase further.

“Greece is very unlikely to lose eligibility at the ECB next year as it would need to be downgraded below investment grade over that period,” Jacques Cailloux at RBS in London said in a research note. “In the more medium term, and perhaps from January 2011, the situation could become much more difficult if the ECB was to revert to its pre-crisis collateral policy.”

Here is the interview George Papaconstantinou, Greek Minister of Finance, gave to the CNN:

Wire: VOXANT – Spanish CNN (VOS) Date: Dec 9 2009 6:37:36

Date: December 8, 2009 Time: 14:00:00
Guest: George Papaconstantinou, David Blanchflower, Giovanni Bisignani, Neil Bentley, David Arkless
High: Greece’s sovereign debt has been hit with a downgrade by Fitch.

RICHARD QUEST, HOST, QUEST MEANS BUSINESS: Tonight, an alpha economy no more, Greek stocks take a battering. The country’s credit rating is cut. We speak to Greece’s finance minister.


Good evening. Greece, tonight, becomes the latest country to be battered by the markets, following a downgrade of its sovereign debt. The main stock market in Athens fell more than 6 percent. And that is after some marking falls on Monday.

The decline all happened after the Fitch ratings agency cut Greece’s credit rating to triple B, plus. That is also with a negative outlook. It is the first time in a decade that Greece has been given a below A grade on its debt.

And there could be further falls to come. Another top ratings agency, Standard & Poor’s, has warned it may lower the country’s credit rating because of the ballooning government debt.

The core issue, of course, is whether or not Greece is able to avoid a default on its sovereign debt and in doing so, whether it might have to seek further financial help, whether from the IMF, the ECB or other Euro institutions.

On the line now, Greece’s finance minister, George Papaconstantinou, joining me now.

And Minister, tonight, in Athens, you are facing a full scale financial crisis, aren’t you?

GEORGE PAPACONSTANTINOU, FINANCE MINISTER, GREECE: Good afternoon. We are facing a difficult situation. No, no -absolutely nothing to say about that. At the same time we are a new government that is putting together very quickly a number of initiatives and measures to reassure the markets and our European partners that we are serious about reducing the extremely high deficit that we have, unfortunately, inherited from the previous government.

Remember, we are a government which is in office for 50 days. We started from a very difficult point. And we are doing and we are committed to whatever it takes to make sure that we get the economy back on track.

QUEST: OK, I suppose, I understand that after just 50 days, it is just about impossible to answer many of these questions. But straightforwardly, is it likely that you are going to default on debt, or have to seek further financing, either from the IMF or the ECB, or from other institutions?

PAPACONSTANTINOU: No, the straightforward answer is absolutely not. And this is for the following reasons, what you are seeing at the moment is the rating downgrades basically reflect the lack to credibility that we have seen in the past. We are building that credibility back with a new budget that has been tabled to parliament, which cuts the deficit by 3.6 percentage points, half of which comes from permanent measures, both on the expenditure, and on the revenue side.

We are in the process of a major overhaul of the tax system and expenditure review, which will reduce expenditures throughout the –

QUEST: Right.

PAPACONSTANTINOU: -public sector. So, there is movement on all reform fronts. And I think this will reassure the markets.

QUEST: But realistically to cut the budget deficit by 3 percent in an economy that is already suffering from recession, that is going to have a depressing effect, which could send you double dip, straight back down again.

PAPACONSTANTINOU: It depends what kind of expenditures you are cutting. We are cutting operational expenditures. We are cutting consumption expenditure, whether public sector -we are not cutting back public investment, which we need, in order to keep growing as an economy and not sink deeper into recession.

We are cutting down on waste, we are cutting down on things which are not needed. And unfortunately the last few years we have had a lot of that.

QUEST: Don’t you face a serious problem next year in that some of the debt that is now graded, triple B, or anything less than A, is not valid for you being used as collateral to the ECB, for further liquidity. And many people suggest that is going to be a problem for you, Minister, next year.

PAPACONSTANTINOU: Yes, once the ECB tightens the eligibility criteria, at the same time 2010 will be a year where we will be needing to borrow less than we did in 2009. For the moment we are borrowing at a higher price, but there is not lack of liquidity in the markets. But it is a difficult situation. There is no question about that. And the fact that we move with the kind of reforms which are necessary to reassure the markets, the easier it will be to borrow next year.

QUEST: Minister, finally, the situation tonight, in Athens seems to be, you know, you may well have it under control and you may have a plan to move forward, but whether it is the markets, or whether it is the Greek people, there is going to be some very turbulent times for you in the weeks and months ahead.

PAPACONSTANTINOU: Well, let’s put things in perspective, shall we? The stock market fell 7 percent last week, after Dubai. It then rebounded by 7 percent the next day. So, a daily change in the market index doesn’t say as much as the faith that investors have that there is investment opportunities in this country, that we are moving forward, that we are actually addressing structural problems that we have had for a very long time. And that we are putting an order in our public finances.

QUEST: Minister, many thanks indeed for joining us. We appreciate it. Thank you for coming on QUEST MEANS BUSINESS.


One Response to “who’s the daddy now”

  1. Samantha Says:

    Nice Blog, and nice post to, i get so many information in this blog, i will visit this blog frequently…

    I like your post, specially about
    SP say that there is a 13% chance that a BBB+ country moves to A- or above within a year (table 14). This is a historical average figure, and as I mentioned before, could well overestimate the chances of Greece getting back on the As. Much of the sample is from the booming 90s, and assuming the same dynamics today will be misleading.



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