Tuesday, December 21, 2010

Greece Faces `Heightened' Probability of Debt Rating Downgrade, Fitch Says

By Greg Chang and Anchalee Worrachate - Dec 21, 2010 10:51 AM PT

Greece may have its credit rating cut to non-investment grade by Fitch Ratings within six weeks after a review of the nation’s “fiscal sustainability.”

The assessment will focus on government measures to lower the budget deficit, the economic outlook and the “political will and capacity of the Greek state” to push through austerity measures, the company said in a statement today. Greece is rated BBB- at Fitch, its lowest investment-grade rating.

Fitch said it expects the review to be completed in January and there is a “heightened probability” of a downgrade.

Greece, the first euro-area nation to seek international aid this year, already has non-investment grade ratings at Moody’s Investors Service and Standard & Poor’s. The Greek bailout in May and subsequent aid for Ireland last month have so far failed to quell investors’ concerns that Europe’s debt crisis may spread to other nations.

“On the margin, this will further put pressure on peripheral spreads at the time when sovereign credit quality is a major concern,” said David Keeble, New York-based head of fixed-income strategy at Credit Agricole Corporate & Investment Bank. “But this is barely a surprise move. Fitch is the final guy to catch up. The market has moved way ahead.”

Moody’s has Greece on a Ba1 rating, while S&P has it on BB+. The extra yield investors charge to hold Greek 10-year debt over German bunds was at 898 basis points today, compared with a record of more than 965 basis points in May.

The so-called yield premium on Ireland’s debt, which rose to a euro-era high of 680 basis points on Nov. 30, was at 590 basis points today. Portugal was at 354 basis points.

Greece is cutting spending and raising taxes as a condition of its aid from the European Union and International Monetary Fund. The IMF said on Dec. 17 that the country’s rescue program has “continued to perform well” and it approved payment of another 2.5 billion euros ($3.3 billion) under the deal.

“The overall fiscal adjustment to date has been impressive,” the IMF said last week. “It is important that fiscal structural reforms be forcefully advanced to ensure a lasting consolidation.”

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