The shocking downgrade catapulted the spreads

The move by Moody’s, just before the crucial summits where a lot of the Greek requests are expected to be satisfied in the frame of a comprehensive solution for the Eurozone, responding to the objections and concerns raised by the agencies themselves, is considered as incomprehensible and provocative by the ministry of Finance.

On Clean Monday, Moody’s Investors Service announced that they are downgrading the credit ability of Greece by 3 units, from Ba1 to B1.

At the same time they did not exclude the possibility of a bigger downgrade due to the persisting economic difficulties of the country and the undiminished danger of bankruptcy.

Almost immediately, Moody's decision to downgrade the solvency of Greece by three units became the main headline in the international financial agencies.

Bloomberg agency reports that after the announcement, there was a rise in the spread of the 10-year Greek government bond by four basis points, to 901 basis points (9,01 percentage points), while the euro exchange rate fell by 0,1% against the dollar and stood at 1,3975 dollars, after having reached 1,40 dollars.

Reuters agency spoke about the answer of the Finance ministry to the announcement of Moody's, emphasizing the points that characterize the decision as unjustified and highlight the urgent need for more effective regulation of rating agencies.

The ministry’s answer

In an unprecedented announcement for a rating agency, both in scope and intensity, the Finance ministry is saying: «Today's downgrade by Moody's is totally unjustified and not based on an objective and balanced assessment of the economic conditions faced by Greece. Additionally, the extent of the downgrade and the time that this particular agency chose to announce it, are incomprehensible and raise serious questions».

«The decision of the rating agency is based solely on the perceived risks of the program and the international situation. The progress that has been achieved is only just mentioned in the announcement, but is not included in the analysis or the positive outlook it creates for the economy», the ministry adds.

And continues: «The arguments put forward by the agency in its relevant statement in no way correspond to the progress made in recent months and are not justified by any of the developments and information that have been added since June 2010, when the previous downgrade of the country was decided by the same agency».

«The announcement moves a step further, predicting the failure of such specific policies – while a large number of reforms has been implemented – but also of the EU decisions, when everybody knows that the negotiation for the summit at the end of the month is ongoing, and the final decisions have not yet been made».

«In particular, Moody's agency relies on the argument that the work of the structural changes is difficult and poses many risks to its achievement, something which has been known since May last year, when the program was signed. In the nine months that have elapsed, Greece has not only demonstrated its determination to proceed with reforms, but has also implemented interventions and reforms on an unprecedented scale. The reduction of the deficit by six percentage points of the GDP and of the primary deficit by more than seven points of the  GDP is the biggest proof that, compared with nine months ago, not only have the risks not increased, but instead, the country has entered an aggressive fiscal adjustment path to eliminate them completely».

«Moreover, the announcement calls for the delay in the recovery of revenue, when the result from the implementation of the 2010 state budget shows an increase in revenue of almost 6% in a country where the recession was at 4,5%. Moody's goes even further, anticipating - without any new data - the failure of policies that have either not yet been passed - like the tax bill which is in parliament - or have just started being implemented».

Finally, Moody's cites uncertainty about the conditions in the Eurozone after 2013 and their impact on the Greek debt, even though everyone knows that decisions at EU and Eurozone level are still in treatment process and that there is specific commitment by most countries about decisions in the regular summit in March. This argument ignores completely the expression of determination of the member countries of Eurozone to continue in every way the support of countries that face similar problems of access to loan funds».

«Greece is evaluated every three months by three international organizations, both in terms of the implementation of the program of structural change and the progress marked in the indicators of fiscal consolidation and competitiveness. The recent evaluation by the European Union, the International Monetary Fund and the European Central Bank confirms the progress made by the country and the estimates for budgetary consolidation move in the opposite direction from that adopted by that rating agency. This intensifies the feeling that the decision for Greece’s downgrade is not based on strong arguments», adds the ministry.

«Ultimately, today’s downgrade is more revealing about the wrong motives and lack of accountability of rating agencies, rather than the actual situation of the Greek economy. These agencies did not treat in a timely manner the increased risk in the financial sector that led to the crisis of 2008, and are now competing for the lead in the «discovery» of risks that will lead to the next crisis. In a particularly sensitive time for the global economy and markets, such unjustifiable decisions involve the risk of becoming self-fulfilling prophecies. Sure enough they render urgent the need for a more effective regulation at European and global level of the rating agencies themselves», the announcement concludes.

In any case, the decision by Moody's does not affect in any way the financing of Greece, since the country continues to raise funds from the support mechanism. Moreover Greece, in cooperation with the European Central Bank, EU and IMF has taken all necessary measures to safeguard the stability and liquidity extraction for the Greek banking system.

The Commission does not comment

Following standard procedure, the European Commission does not comment on the announcements of rating agencies, said in Brussels one of its spokesmen, when she was asked to comment on the downgrading of the creditworthiness of Greece by Moody's.

Specifically, in response to a relevant question during a press conference, Amelia Torres said «We have our own evaluations, which you know and which we make available at regular intervals. This position does not change, either for Greece or for Moody's» the Commission representative stressed characteristically.

In addition, answering a question about the results of the recent Summit of the EPP on the need for flexibility in the lending programs of Greece and Ireland, Amelia Torres said that currently there are discussions about the extension of repayment time for the loans and interest rates, stressing that these two issues are interrelated.

But the representative did not want to proceed with estimations about the consequences of such a decision.