Thursday

28th Mar 2024

EU demands Greek action in wake of downgrade

The European Commission has called on Greece to step up its deficit cutting measures just hours after the embattled EU country had its credit rating cut on Tuesday (8 December).

With Athens still reeling from two days of violent protests marking the anniversary of a police shooting of a 15-year old boy last year, credit ratings agency Fitch cut the country's debt grade to BBB plus – a new 10-year low.

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  • Greek public finances are in ruins (Photo: EUobserver)

News of the rating cut plunged shares on the Greek stock market by more than six percent and prompted the EU's economy commissioner Joaquin Almunia to speak out.

"A difficult situation in one euro-area member state is a matter of common concern for the euro area as a whole," said Mr Almunia in a statement.

"It is clear that Greece faces very substantial economic and fiscal challenges ... but more measures are required," he added.

Athens is forecast to run up a budget deficit in excess of 12 percent of GDP this year, with its overall debt level expected to reach 125 percent of GDP in 2010 – the highest within the 16-member Eurozone.

Tuesday's ratings cut by Fitch – likely to be followed by other ratings agencies – is a reflection of the poor state of Greece's public finances and the increasing market jitters over a possible default.

Fitch said the downgrade "reflects concerns over the medium-term outlook for public finances, given the weak credibility of fiscal institutions and the policy framework in Greece, exacerbated by uncertainty over the prospects for a balanced and sustained economic recovery."

The country's new Socialist government, which took over in October, has pledged to tackle the problem, issuing a new budget in November that aims to bring next year's deficit down to 9.1 percent of GDP.

But analysts query the administration's ability to put new revenue-raising measures in place, with tax rises on civil servants announced in Ireland this year prompting the largest public sector strike in over three decades.

Since joining the Eurozone in 2001, Greece has repeatedly failed to keep its deficit within the three percent of GDP threshold laid down by common currency area's rules.

Money raising problems?

Greece's downgrade to the lowest level of any Eurozone member could also prove to be a major headache for the country when it looks to raise further capital.

The higher risk rating is likely to raise the cost of borrowing on the international money markets, but could also hamper the country's ability to borrow from the European Central Bank.

Under pre-financial crisis rules, any country with a BBB plus rating would have been prevented from exchanging its sovereign bonds for ECB loans.

The central bank is expected to keep its crisis-relaxed rules - that accept ratings down to BBB minus - next year, but may return to the stricter requirements in 2011.

In the absence of any formal bail-outs for euro area economies, borrowing from the ECB has proved an important aid for a number of states.

'Swiftly dial back' interest rates, ECB told

Italian central banker Piero Cipollone in his first monetary policy speech since joining the ECB's board in November, said that the bank should be ready to "swiftly dial back our restrictive monetary policy stance."

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