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This shouldn’t have come as a surprise, but apparently enough investors were still not expecting it so that Standard & Poor’s downgrade of its credit rating on Greece has pushed down global stock markets.

Today, December 17, S&P cut Greece’s credit rating one level to BBB+ from A-. This follows on the hard on the heels of a December 8 announcement that it was putting the country’s sovereign debt rating on credit watch. Fitch Ratings cut Greek debt to BBB+ that same day. S&P had lowered Greece’s debt rating to A- in January. The downgrade leaves Greek government debt ratings at investment grade but only three steps above falling to non-investment grade or junk status.

This downgrade puts Greek government bonds dangerously close to losing their eligibility as collateral at the European Central Bank. The bank currently accepts bonds rated at BBB- or above as collateral for loans. The bank relaxed its lending standard to BBB- in 2008 in response to the global financial crisis. The European Central Bank has announced that it intends to revert to its old A- minimum standard for collateral in 20210.

It’s the speed with which the actual downgrade has followed the announcement of a credit watch that has unnerved markets today. The aggressive action by S&P has raised worries that the Greek financial situation is deteriorating faster than bond holders had imagined—the country’s budget deficit recently climbed to 12.7% of GDP (gross domestic product), the government announced. And that has led some bond managers to believe that a downgrade to BBB could be in the cards by March.

Yield spreads between Greek and German bonds, regarded as a benchmark for safety among European issues, climbed to 2.25 percentage points, the most since April. Greek stocks were down 2% on the news.

But as I explained in my post yesterday http://jubakpicks.com/2009/12/16/a-rising-dollar-stalls-all-boats-so-far/ and in an earlier piece on the euro crisis http://jubakpicks.com/2009/12/16/the-euro-crisis-just-keeps-getting-worse/ the damage isn’t limited to Greece and Greek stocks and bonds.

The Greek crisis is also a euro crisis. As of 10:30 ET on December 17 the U.S. dollar had climbed to the highest level in three months against the euro and was up against the world’s 16 most-traded currencies. The yen, another safe haven currency, also climbed.  

And it has triggered a global jog (not yet fast enough to be called “flight) toward safety.

Following the recent pattern of if-the dollar-is-up-commodities-are-down oil, gold, and copper all fell in morning trading.

And so did emerging markets as lower commodity prices and the move to safety weighed on the stock prices from Brazil (down 1.2%) to Hong Kong (down 1.2%) and Shanghai (down 2.3%).

It hasn’t helped that news out of the United Kingdom has also been negative today. The Office for National Statistics reported that British retail sales fell in November for the first time since May. That dropped the pound to its lowest level in two months against the U.S. dollar.

Or that the Greek government continues to sound clueless as it announces half-steps to solve its budget crisis.  “We take into serious account each international evaluation,” the Greek Finance Ministry said in a statement.  “However, we have our own strategy and we insist on this.”

That strategy includes what Prime Minister George Papandreou called “radical” measures such as increasing the 2010 target for deficit reduction to 4 percentage points from 3.6 percentage points. That would leave the deficit at 8.7% of GDP instead of today’s 12.7%. The European Union limit is 3% of GDP.

Radical. Yep.