Greece Gets World’s Lowest Rating by Fitch in Catch-up Downgrade

Thursday, 14 Jul 2011 07:28 AM

 

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Greece’s credit rating was cut three levels to Fitch Ratings’ lowest grade for any country in the world as the company followed rivals and said that a default is a “real possibility.”

The move to CCC from B+ “reflects the absence of a new, fully funded and credible” program by the International Monetary Fund and the European Union, the ratings company said yesterday in a statement in London. It also reflects “heightened uncertainty surrounding the role of private creditors in any future funding, as well as Greece’s weakening macroeconomic outlook.”

Fitch is the third ratings company to cut Greece to the bottom tier of its rankings, reflecting concerns that a new aid package being negotiated for the nation will inflict losses on investors. Greece was downgraded to Caa1 by Moody’s Investors Service on June 1 and CCC by Standard & Poor’s on June 13.

“We’re so far past the stage with Greece where ratings themselves make a difference because they’re all so low,” said Vincent Truglia, managing director of economic research at New York-based Granite Springs Asset Management LLP and a former head of the sovereign risk unit at Moody’s. “What’s more important is what the effects will be when Greek debt is essentially rescheduled and the effect on the periphery.”

In its statement, Fitch said that it has taken Greece off Ratings Watch Negative.

No Difference

“Fitch finally caught up with the rest on Greece,” said Peter Schaffrik, head of European rates strategy at RBC Capital Markets in London. “At this point, CCC or B+ doesn’t make much difference. It’s whether Greece will go to D or SD that really matters.”

The difference in yields between Greece’s benchmark 10-year bond and comparable German debt rose 16 basis points to 1,423 basis points yesterday before Fitch cut the rating.

More than a year after Greece received a 110 billion-euro ($156 billion) aid package that aimed to stem the spread of the region’s sovereign-debt crisis, EU officials are trying to put together a new package for Greece as the country remains locked out of bond markets. A two-day meeting of finance ministers concluded this week without an accord on a new package.

European officials have struggled to agree on whether investors should bear some of the burden of any losses from Greece. The European Central Bank has opposed such a move, saying it risks causing a crisis on a par with the collapse of Lehman Brothers Holdings Inc. in 2008.

Default Risk

Fitch’s new assessment “encapsulates substantial credit risk and acknowledges that default is a real possibility,” it said in the statement yesterday. “As previously stated by Fitch, private sector involvement would likely be viewed as a sign of sovereign credit impairment and could trigger a rating default event.”

Greece’s finance ministry challenged the move yesterday, saying that it’s “questionable” why Fitch took its decision given the fact that there is a timeframe known for international action to aid the nation.

Ireland and Portugal followed Greece in seeking bailouts as investors shunned the debt of the region’s other high-deficit nations, driving up their borrowing costs. Both countries have also had their ratings cut to non-investment grade by Moody’s.

Fitch said that there are “growing doubts” on whether Greece can withstand a further fiscal squeeze at a time of economic and financial uncertainty. It predicted an economic contraction of 4 percent this year, followed by a “weak recovery” in 2012.

“The crisis is not going to get better with all the band aids people are using and all the constant calls for austerity that’s being heaped on in the Greek case,” Granite Springs’ Truglia said.

© Copyright 2014 Bloomberg News. All rights reserved.

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