Greek debt slashed to junk status

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Greek debt slashed to junk status

News Article Date: Tuesday 15th of June 2010

Greek debt slashed to junk status
Click here for more information about mortgages in Spain The agency made the move despite the European Union's multi-billion-dollar bailout package, and now there is speculation that foreign banks are steering clear of countries like Spain. The downgrade by Moody's was not unexpected. Back in April, Standard and Poor's also slashed Greek government debt to junk status, warning investors might get less than a third of their outlay back.
Click here for more information about mortgages in Spain But the latest move comes after the European Union and the IMF intervened with a $130 billion bailout package. Moody's says the rating incorporates a greater, albeit low, risk of default. But not everyone is convinced Greece can meet its debt obligations. Charles Jenkins from The Economist Intelligence Unit says Greece's debt is difficult to manage. "It is now absolutely clear that Greece has got a combination of deficits and debt levels, which will be extremely difficult to manage and it may be that they will have to write down some of that debt," he said. "[The] $130 billion is a loan, it's not a gift and it's a loan at a fairly high interest rate - not as high as market rates, but fairly high, around 9 per cent. So it has to be paid back. "Now, it will cover Greece for the next couple of years or so. So Greece should be able to tackle its problems without worrying too much about what the markets are doing over the next 18 months to two years.
Click here for more information about mortgages in Spain "But after that the loan will run out and other governments are not going to be willing to just thump up indefinitely." The risk, according to Moody's, is that the tough austerity measures Greece has implemented will only damage the country even more and make the chance of an eventual default even greater. Mr Jenkins says the Greek government has made efforts to change. "Taxes have been boosted, [there's been a] crackdown on tax evasion, salaries have been effectively cut by up to about 10 per cent," he said. "That's admittedly by taking away bonuses, which have never been there in the first place, but nevertheless it does effectively cut the salaries of most people in the public sector by about 10 per cent." "Pension age has been raised radically; pensions themselves will be cut, so I think the signs of implementation is becoming more credible, not less credible. "But the trouble is even with implementation they just won't be able to pay back that huge great debt and all the interest on it. It's just too much to ask." Greece might be the epicentre of the sovereign debt crisis, but the constant threat of contagion is emerging elsewhere in Europe. Today Spain admitted for the first time that some foreign banks are refusing to lend and that Spanish banks are dealing with a liquidity freeze in the interbank market. Spain says it is not Greece and does not need help right now, despite a public backlash over similar austerity measures. But German chancellor Angela Merkel has reminded Spain that the EU's trillion-dollar rescue fund is standing by just in case. "Conditions have been set out clearly, so we shouldn't be concerned. That's exactly what we discussed at our meetings where we said we need such a safety net," she said. "Spain and any other country knows that they can make use of this mechanism if necessary." The uncertain outlook for Europe and how to deal with the threat to monetary union has strained ties between the economic powerhouses of Germany and France. Dr Merkel's aid to Greece has caused local political grief while France has been frustrated over delays in resolving an impasse over how the EU is run. Today French president Nicolas Sarkozy seemed cautiously pleased that Dr Merkel is now prepared to mend fences on policy splits. "I would like to say that I fully agree and I am happy to hear from the chancellor's mouth that it is necessary to strengthen Europe's economic government," he said. "This is about coherence and in my view it is very important to see it that way." The Greek downgrade cam after the European markets had closed, but it was enough to push Wall Street lower. Investors pondered the view of the Bank for International Settlements that the outlook for sovereign debt resembles the subprime mortgage crisis that took the world to the brink of meltdown less than two years ago.

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