EU anger at downgrading of Greek debt to junk status

EUROZONE officials yesterday denounced a sharp debt downgrade for Greece where officials insisted an EU-IMF- backed recovery plan was bearing fruit as they braced for street protests against austerity measures.

The move by ratings agency Moody’s on Monday to cut Greek debt to junk status came as auditors from the EU and the IMF scrutinised claims by Greece that it was ahead of target in fighting its debt mountain and public deficit.

Olli Rehn, the EU’s top economic commissioner, told the European parliament Moody’s decision was “surprising and highly unfortunate” and said it raised questions about the role of ratings agencies in the financial system.

Jean-Claude Juncker, head of the eurozone finance ministers’ group, called the move “irrational,” notably in light of substantial support for Greece from the EU and the IMF.

“I am totally convinced that a few months from now, the financial markets will see they were wrong. They’re misinterpreting the decisions which have been taken,” he said.

Moody’s said considerable uncertainty about Greek plans, even with the help of a €110 billion EU-IMF bailout package, to correct public finances justified the ratings cut.

“This uncertainty represents a risk that leads Moody’s to believe that Greece’s creditworthiness is now consistent with a Ba1 rating, a rating which incorporates a greater, albeit, low risk of default,” it said. The downgrade, from a rating of A3, means some investors will no longer be allowed to buy Greek debt under terms of their investment mandate and could lead to still higher borrowing costs for Athens if it goes to the markets for cash.

Moody’s followed up with a decision yesterday to downgrade the debt and deposit ratings of nine Greek banks, questioning the capacity of the Socialist government to support its banking network.

Analysts at Citigroup Global Markets warned that strains on the Greek banking system had intensified recently, with deposit outflows accelerating and banks increasing their holdings of Greek government bonds.

But the impact of both moves by Moody’s is not likely to be as painful for Greece as were ratings agency downgrades earlier this year.

The Greek economy has been largely shielded by the EU-IMF bailout mechanism, which allows the government to bypass the bond market and borrow at below-market rates.