Dimitris Yannopoulos

 

THE GOVERNMENT moved swiftly on December 9 to calm market fears over the alleged deterioration of Greek public finances following the dramatic downgrade of the country’s creditworthiness by a financial rating agency.

 

The risk premium on Greek government bonds jumped and bank stocks tumbled, extending the December 8 losses on Fitch Ratings’ downgrade of its debt from A- to BBB+, the first time it had fallen below investment grade for more than 10 years. This reflects “concerns over the outlook for public finances given the weak credibility of fiscal institutions and the policy framework in Greece, exacerbated by uncertainty over the prospects for a balanced and sustained economic recovery,” Fitch’s announcement said.

 

Prime Minister George Papandreou vowed to do whatever it takes to curb the country’s huge budget deficit as European Union partners piled pressure on Athens to take action, a day after its credit rating was cut to the lowest level in the eurozone.

 

Nevertheless, finance ministry officials noted that the latest downgrade of the country’s creditworthiness was not based on any new fiscal data since the government unveiled its 2010 budget last month. In it, the new Pasok administration pledged to cut the deficit from an estimated 12.7 percent of GDP in 2009, to 9.1 percent next year, based on realistic belt-tightening and fresh taxation measures, especially against tax-evading homeowners and professionals.

 

 

Appearing to grow accustomed to a “one-panic-per-week” routine following the Dubai debacle, investors have been closely watching statements by Greek and European policymakers on unsubstantiated concerns that Europe’s richer economies “might not step in to bail out Greece” in case of insolvency, according to Reuters. 

 

But even if the eurozone could do otherwise at the risk of a euro collapse, the fears are at least premature, since the threat of a Greek default cannot come earlier than the second half of next year, when the government’s policies should start paying off. 

 

However, the Greek financial markets were pounded by negative speculation on December 8 and 9, including short sales on banking stocks and state bonds. 

 

Fitch also cut Greek bank ratings ostensibly because of the government’s diminished ability to support banks that have a large exposure to Greek sovereign bonds. But Greek banks have been making hefty profits by borrowing cheap from the European Central Bank (ECB) to buy tonnes of government paper with yields of three to four percentage points higher than the ECB liquidity support loans to EU banks. Yield spreads between Greek and German 10-year government bonds widened to as much as 252 basis points on December 8, the widest since March, reflecting risk aversion among investors. The cost of insuring Greek debt against default or restructuring also rose.

 

 

“We must close the credibility gap to survive as a sovereign and cohesive nation,” Papandreou told a televised cabinet meeting on December 9.

 

The new government “will do what is required to be consistent with the need for a medium-term reduction of the budget deficit”, Finance Minister Yiorgos Papakonstantinou stated on December 8. He also dismissed as “unrealistic” the scenario of Greece resorting to the International Monetary Fund (IMF) for financial assistance in the immediate future. 

 

Influential European Central Bank governing council member Axel Weber of Germany said there was no need for the IMF to help Greece out of its fiscal problems since the EU had its own set of rules. “The ball is first of all in Greece’s court,” Weber told business journalists in Frankfurt, adding he expected a “painful and drawn-out” adjustment process in the years to come.In an interview on CNN on December 8, Papakonstantinou stressed that “the government 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 deficit”. 

 

“There is a movement on all reforms fronts,” something that will restore Greece’s credibility, he added.

 

Pushed by financial media frenzy, Greece’s eurozone partners facing similar problems at home kept up the pressure on Athens to get its fiscal adjustment act together. French Finance Minister Christine Lagarde said she did not think Greece could go bankrupt but it must make a real effort to clean up its public finances.

 

The German finance ministry said there is no reason to doubt Greece can do this alone, backing similar comments from Papakonstantinou. 

 

The national debt is forecast to hit 125 percent of gross domestic product next year, which would be the highest ratio in the euro area.