Wednesday, January 14, 2009

Greece’s Hard Knocks: Street riots lead to S&P downgrade

Sources: Financial Times, Wall Street Journal, Wall Street Journal

Today the credit rating agency Standard & Poor (S&P) announced that it has downgraded Greece’s credit rating from A to A-, citing public sector debt and a lack of competition to meet performance standards set by other EU competitors. The Greek deficit has climbed to over 14%, the highest in the eurozone, while its debt to gross domestic product ratio hit 94%, second only to Italy. S&P further noted that Greece’s incompetency in sticking to the proposed budget and poor policies, such as social transfers, the public wage bill, and interest payments on public expenditures, are negatively affecting the Greek economy.

Last Friday, S&P put Greece on 'credit watch' along with Portugal and Spain, but Greece was the only one of the three to get downgraded so quickly. The rating change had negative consequences on Greece’s finances as well as on the EU as a whole. Greek stocks plummeted and the euro took a hard hit, ending the day at a 5% decline. The move sparked grave concern among the other weaker economies of the EU, including aforementioned Portugal and Spain, as well as Ireland, who was downgraded to 'negative outlook' last week.

This bad news comes on the tail of last month’s riots, which were rooted in opposition towards Prime Minister Costas Karamanlis but incited by the alleged police murder of a 15-yr-old boy in the streets of Athens. Ten thousand protesters marched through Athens to protest Karamanlis’s economic policies and the government’s handling of the crisis. The riots may have pushed the already fragile economy over the credit rating tipping point.

Do you think S&P should have given Greece more time to stabilize or was it right to downgrade Greece’s rating so quickly after the warning? Scholars are increasingly citing the credit agencies as a principal cause of the financial crisis. What political and business pressures do you think influenced S&P’s quick decision to drop Greece’s rating?

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