Source:
Roubini Global EconomicsFitch, the ratings agency, has decided enough is enough and has downgraded Greece to BBB-. This is still investment grade despite obvious signs that Greece is no longer an investment grade risk. Not only are the Greeks now (unsuccessfully) marketing their bonds in the US as an emerging market play, the yield on Greek debt is now well above many other countries that are rated non-investment grade.
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Brown Brothers Harriman’s Win Thin says:
Showing impeccable timing, Fitch just downgraded Greece two notches to BBB- and maintained a negative outlook. This is the lowest investment grade rating, and one more would put Greece in junk territory. Fitch has been the most aggressive, and was the first to cut Greece to BBB+ back in Dec. S&P followed suit in March, but Moody’s inexplicably still has Greece at A2 (equivalent to A). This is a very aggressive move by Fitch, as our model shows Greece at BBB/Baa2 but clearly, the situation remains very fluid.
As EM watchers know, countries can get caught up in a vicious circle whereby market skepticism (which leads to higher borrowing costs) actually ends up pushing that country over the edge of the abyss. The Europeans appear to have really missed the boat on this one up big time. A big, timely rescue package with an announcement shock effect was needed and they didn’t deliver. We’ve seen this in EM crises in the past. When officials get cute and try to muddle through, markets will test them. Meanwhile, EM policy-makers are thinking, how did you developed world guys mess this up so badly? We think the EU should have asked Brazil, Korea, and others in EM on how to stabilize market sentiment when sovereign risks are rising. And as long-time EM observers, we would NEVER, ever underestimate the threat of contagion.
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