December 25, 2009
For the past few weeks, rating agencies like Fitch and Moody’s have hoped to stir up a financial storm within the European Union by downgrading Greece’s sovereign debt and treasury bond issues. On the Greek stock exchange, the downgrade has prompted a slide in bank shares, amid fears that government T-bills cannot be used as collateral by local banks when borrowing money from the ECB (source: Kathimerini).
Although this has created quite a stir for a while in the media, the EU officials are confident that the deficit reduction measures adopted by the new Pasok government are sufficient to contain the crisis. To its credit, Moody’s recognizes that Greece does not experience a short term credit crunch, so the spectre of country default is not in the cards. As Cypriot central bank governor Athanasios Orphanides puts it, “there is arguably a greater risk of default on the debt of a US state than there is on the debt of a euro area member”.
To be sure, the Greek government does have to find solutions to the country’s thriving tax-avoidance industry and to reduce the size of its budget deficit. Plans to that effect are already underway. The hope of some US rating agencies that somehow the problems experienced by Greece or Ireland will harm the euro or the ECB is wishful thinking.Florian Pantazi