2009 Downgrading of Greece Credit Rating

In Dec 2009, after the finance minister in Greece’s new socialist government disclosed that the nation’s deficit would soar this year to almost 12.5 per cent of gross domestic product, the Greece credit rating is downgraded by 3 global leading rating agencies. At first, Fitch rating agency downgrades Greece's credit rating to BBB+ from A. Followed by Standard and Poor’s rating agency downgrade Greece’s credit rating. Lastly, Moody’s rating agency downgrades Greece to A2 category from A1. Yet, it is the first time in 10 years a leading agency has given Greece a rating below A grade.

Credit rating agencies as providers of opinions about the creditworthiness of companies and countries have become very important players in financial markets due to growth in Capital and Investment Market. They are high influential over the credit supply to firms and are held accountable for their actions. Yet, they were criticised for the failure of rating correctly certain financial products. They were accused of exacerbating the EuroZone crisis by downgrading the sovereign ratings, contributing to the severity of the bank collapse.

The reason of downgrading of credit rating is mainly due to the high level of outstanding debt and consistent financial budget deficit. It reflects concerns over the medium-term 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.

So, what are the negative effects of downgrading credit-rating? Financial investors, in particular banks and insurance companies, used to invest heavily in sovereign bonds of Eurozone countries. Downgrading may therefore not only increase the likelihood that other members of the currency union will be forced to bail out the ailing country but also weaken its own domestic banks. Both issues may pose a threat to the sustainability of their own government debt levels. Foreign investors may therefore interpret negative rating news on one country as a signal of worsening fundamentals in the Eurozone as a whole and subsequently withdraw their funds. This reaction may worsen the fundamental economic situation and trigger even further withdrawals. Thus, it becomes more difficult to raise money in the bond markets and through the European Central Bank’s liquidity operations. The rating announcement would then become a self-full-filling prophecy and trigger a currency crisis.

Although the Greece government has announced big spending cuts to reduce its levels of debt, this policy has only partly offset the country's longer-term risks. The government should implement new revenue-raising measures swiftly enough to cut the deficit from 12.7 percent to 9.1 percent of GDP next year in line with budget projections in order to upgrade the credit rating again.