GREECE’S finance ministry was correct to question Moody’s decision on Monday to downgrade the country’s debt to ‘highly speculative’ – from Ba1 to B1. In an announcement issued on Monday the ministry said the decision was ‘incomprehensible’ and had a dig at the role played by rating agencies.
“Ultimately, Moody’s downgrading of Greece’s debts reveals more about the misaligned incentives and lack of accountability of credit rating agencies than the genuine state or prospects of the Greek economy,” said the ministry’s announcement. It also made a legitimate, though theoretical, point. “Having completely missed the build-up of risk that led to the global financial crisis, in 2008, the rating agencies are now competing with each other to be the first to identify risks that will lead to the next crisis.”
It is true that the rating agencies are unaccountable, but they have the power to cause untold damage to an economy as Greece has been finding out. After the downgrade, combined with Moody’s decision to maintain a negative outlook – this means that a further downgrade is likely – the yields on Greek 10-year bonds shot up to 12.2 per cent.
In short, the cost of borrowing for the Greek state is on the rise again, raising serious questions about its ability to avoid the dreaded default.
Once a country finds itself in Greece’s position, it is at the mercy of the ratings agencies, which will always find justification for downgrading. Moody’s justified its decision by saying that while Greece had made “very significant progress” in reducing its budget deficit, it had failed to meet last year’s tax-collection target. The rating agency believed there would be a similar failure this year, attributing it to an under-staffed tax office and low tax compliance in “parts of Greek society”.
Statements by European officials, suggesting that Greece might have to undergo a “solvency evaluation” – its ability to repay its debts would be examined – was also cited by Moody’s.
It could be said that Greece was penalised for failing to meet the tax-collection targets it had set itself. The rating agency, like the European officials, interpreted this, rightly or wrongly, as a sign that the Greek government would not be able to repay its debts.
Needless to say that the downgrading, which would raise the cost of borrowing for Greece, makes this possibility even more likely. The country is in a no-win situation and a default may be inevitable. But would the EU and the IMF allow this to happen after last May’s €110 billion bail-out which they gave to Greece?
