5th Dec 2022

Greek credit downgraded amid concerns about EU debt plan

  • Question marks remain over the Greek deal (Photo: danoots)

Just days after leaders made what they termed an "historic" agreement in a bid to draw a line under the eurozone debt crisis, the markets indicated there is still concern about the fundamentals of the deal.

Spain and Italy's funding costs rose on Monday (25 July) to levels higher than when the first details of the deal became apparent during last week's emergency summit of EU leaders in Brussels.

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According to the Wall Street Journal, Spain's debt on Monday afternoon was being traded at a yield of 6 percent, or 3.24 percentage points above the rate on German bonds, seen as a safe investment. Italy's debt was being traded at a yield of 5.5 percent.

During Thursday's summit, the borrowing costs for Spain were 5.7 percent and 5.2 percent for Italy, down from the highs at the beginning of last week of 6.3 percent and 5.8 percent respectively.

EU leaders hammered out an agreement on a second €109bn bailout for Greece as well as loosened the rules for the use of the eurozone rescue fund, giving it a more preemptive role.

However, once the smoke cleared around the general relief that leaders had managed to forge a deal, the details raised further questions.

Chief among the concerns is that although the rescue fund was made more flexible, its funds were not increased. The €440bn in the pot are not sufficient for bailing out Italy and Spain, the single currency area's third and fourth largest economies.

Meanwhile, there are still big question marks over aspects of the Greek agreement. Its success will depend on whether Athens is able to raise the €28bn over three years from a privatisation drive - sceptics say it won't.

There is also the voluntary nature of private sector involvement to the tune of €54bn. Last week's deal offered a "menu" of options for how the private sector is to be involved, but the details have to be hammered out.

The over-riding question after the deal was agreed remains whether Greek debt is sustainable, with critics saying it is not.

Moody's rating agency on Monday said the Greek bailout would worsen the EU debt crisis and cut Greece's credit rating further.

For some "non-Aaa sovereigns with high debt burdens or large budget deficits... the negatives will far outweigh the positives and weigh on ratings in the future" said the agency of the Greek deal in what is thought to be a reference to Spain and Italy.

It said the fact that private investors had taken a haircut on their investments under the Greek deal meant they would be open to such write downs under potential future bailouts for other countries.

But no matter the efficacy of Thursday's deal, German chancellor Angela Merkel, who set most of the terms of the agreement, is likely to have a domestic struggle on her hands when the details are discussed after summer recess in September.

Many Germans - their country is the continent's paymaster - remain against the idea of a transfer union, with last week's agreement seen as taking a significant step towards such a set-up.

"The autumn will be the real test (of the government). I am no longer sure they will survive until 2013," Frank-Walter Steinmeier, leader of the opposition Social Democrats, told the Tageszeitung.

An opinion piece in Die Welt newspaper, published Monday, said Merkel may have been praised on the European stage but "she has saddled future generations in Germany ... with immense risks".

It calls on the reader to be outraged saying there is only "slim hope" that German MPs, who will vote on the measures, will also be angry.

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