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 http://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.