Greece’s credit rating was cut on Friday three levels by Fitch Ratings, which said that even a voluntary extension of its bond maturities being studied by EU policy makers would be considered a default.
Fitch cut its rating to B+, four levels below investment grade, from BB+ and said that the country could face a further reduction in its creditworthiness. The yield on Greek 10-year bonds jumped 57 basis points to 16.6%, more than twice the level of a year ago when Greece accepted an EU-led bailout.
“The rating downgrade reflects the scale of the challenge facing Greece in implementing a radical fiscal and structural reform program necessary to secure solvency of the state and the foundations for sustained economic recovery”, Fitch said in an e- mailed statement.
More than a year after Greece received a 110 billion-Euro aid package that aimed to stem the spread of the region’s sovereign crisis, the nation’s debt is rising, borrowing costs are near records and European policy makers are considering additional aid. Ireland and Portugal followed Greece in seeking bailouts as investors shunned the debt of the region’s other high-deficit nations.
Greece’s two-year bonds yield more than 25%, indicating investors are betting Greece won’t be able to return to markets as planned under the bailout next year, when it’s due to sell about 27 billion Euros of bonds.
“Greece risks a sovereign default and finance ministers have expressed strong doubts about the sluggish progress,” in controlling its public finances, French Finance Minister Christine Lagarde said in an interview published Saturday in Austrian newspaper Der Standard.
The cost of insuring Greece debt against default increased 13 basis points to 1,335, down from a record 1,375 on May 9.
“The B+ rating incorporates Fitch’s expectation that substantial new money will be provided to Greece by the EU and IMF and that Greek sovereign bonds will not be subject to a ‘soft restructuring’ or ‘re-profiling’ that would trigger a ‘credit event’ and default rating,” Fitch said.
European finance ministers on May 17 for the first time floated the idea of talks with bondholders over extending Greece’s debt-repayment schedule, saying that last year’s rescue failed to restore the country to financial health. After a year of austerity that included cuts to wages and pensions and higher taxes, Greece’s debt is still forecast to reach almost 158% of GDP, more than twice the EU limit and the biggest in the Euro history.
“An extension of the maturity of existing bonds would be considered by Fitch to be a default event and Greece and its obligations would be rated accordingly,” Fitch said.
Even if Fitch or other rating companies determined that extending maturities constituted a default, the ruling wouldn’t necessarily trigger credit swaps insuring Greek debt. That decision may be made by the determinations committee of the International Swaps & Derivatives Association.
Greece’s Finance ministry said the Fitch decision ignored renewed commitments from the government for deficit cuts and a stepped-up state asset sales program to meet 2011 targets. Greece this week pledged to give details on an additional 6 billion Euros of spending cuts and revenue measures and to accelerate a program of 50 billion Euros of asset sales to meet the 2011 deficit target of 7.4 percent of GDP.
The country missed its target for last year, reporting a shortfall of 10.5% of GDP, versus a goal of 9.4%.
Fitch’s move follows a two-grade cut to B, five levels below investment grade, by Standard & Poor’s on May 9, which said further reductions are possible as the risk of default rises. The same day, Moody’s Investors Service placed Greece’s B1 ratings on review for a possible downgrade, citing a bigger- than-forecast 2010 budget shortfall, debt sustainability concerns and a deepening recession.