I’m sure the Greek government today is saying “Better never than late.”
Moody’s finally got around to lowering its credit rating on Greece to junk today, June 14, just a month-and-a-half after Standard & Poor’s lowered the country’s credit rating to junk or non-investment grade on April 27.
Moody’s lowered its credit rating on Greece four steps, a huge move all at once, to Ba1 from A3. (The third major credit ratings company Fitch Ratings has Greece pegged at BBB-, the lowest possible investment grade.)
The downgrade didn’t send European stocks tumbling or spread panic through the euro today because investors saw the move as what it was, an effort by a credit rating agency to catch up with its peers.
It’s hard to argue that today, after the European Monetary Union has announced a $900 billion plan and after Euro Zone politicians hammered out the details of that plan that Greece is in worse shape than it was on April 27 before any of that took place.
No, I think investors long ago decided that Greek bonds were junk—they’re priced at junk levels–and so today’s announcement merely confirmed what they’re been thinking. From that point of view the announcement may actually be a slight positive since it removes the threat of a Moody’s downgrade from the market.
But Moody’s hasn’t done Greece any favors.
While it didn’t panic the market today, it did increase longer term downward pressure on Greek debt. Indexes that are pegged to investment grade bonds now don’t have any choice but to sell their positions—and that goes for investment funds that mimic these indexes.
In the longer, longer term, the downgrade is also likely to remind investors that the Euro Zone bailout mechanism is rather shaky. (See my post https://jubakpicks.com/2010/06/10/return-of-son-of-bounce/ for some of weaknesses in the program.)
And it will keep the European Central Bank on the hot seat. The bank has been providing support to Greek bonds and Greek banks by continuing to accept Greek debt as collateral for loans (at a relatively modest discount) even as its credit quality slipped. Not all European governments have been happy with that policy and some have argued that it seriously damages the bank’s credentials as a guarantor of sound monetary policy.
Now that Moody’s has joined S&P the pressure on the bank will intensify just as the options open to the bank are shrinking. A decision by the central bank to refuse to accept Greek government bonds as collateral would provoke a crisis in the Greek banking industry.
As a bear, I got a chuckle out of the markets moving on this news. Was there someone out there holding onto their stocks in the hope that Moody’s wouldn’t downgrade Greece to junk? Apparently someone was…
Seriously though, if the markets will drop on a non-event like this, imagine what they’ll do with legitimately bad news?
BBB- is S&P ratings, for I think high junk (BBB) that looks to get a little worse in the future (-). http://www.quantumonline.com has some info on this too.
This downgrade was not a “news”. People knew it would happen long time ago. So it doesn’t mean anything. There’s not much risk to own some NBG share for a long term investment. The reason is simple. This national bank has been there for 100 years and it will still be there maybe in another 100 years. So for long long term, it’s not that risky.
Off topic… Labor Unrest in China
http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2010/06/14/BUP41DTR4D.DTL
Yup. And where’s the alleged transparency problems with the rating scales?
southof8,
My guess would be what I see in other industries. Standardization is great for the consumer, but the companies providing the service would prefer not to standardize because then that would be one less reason why they are different from Y company. And can be sure that they are saying our rating system is better then Y company’s rating system.
What’s the discount on these? I think I’m charitably going to buy some tomorrow if it’s large enough. It’s a win no matter what for me. If they repay then I’ll be paid a nice premium. If they don’t then I’ll write it off and pat myself on the back, and capitalism will have another plaque to hold over the socialists. I wonder if it’ll ever have enough plaques?
Is there some reason the ratings themselves have to be so opaque?
Is Ba1 better or worse then BBB-? Why? Why not?
Is this like some secret handshake? You have to be in the know to undersatand why Ba3 is better or worse than BBB-?
Why don’t they just put them on a 100 point scale, with AAA = 100? Becuase that would be too transparent?
Those who work at the ratings agencies were probably meter maids in their prior career. Or maybe mattress tag checkers.
It is hard for me to believe in Moody’s or the other rating companies based on how they have consistently followed not lead by a large margin, and how they are 1 1/2 months separate with each other on a whole country that is clearly on everyone’s radar screen.
If you haven’t realized that a country/company is junk long before these rating companies say so, then you haven’t been paying attention.
Their only value seems to be to generate a move by government/investment houses to get out of a stock/country that they should have been out of long ago, but have not done their due diligence on.
If I apply the rule of thumb that, if market no longer reacts on bad news, it means it has reached its bottom, does it mean that we just passed the bottom?
At least, NBG reacted positively.
“But Moody’s hasn’t done Greece any favors.” NEWSFLASH!!! Greece hasn’t done Greece any favors! Greece and others (U.S. not too far back) will keep markets on the hot seat for a while. Speaking of hot, it is hotter than Hades in North Florida this past week…reminds me of the markets lately!