Greece has been downgraded by Fitch Ratings to BBB+ over concerns about its budget deficit. Despite the cut, Fitch maintained a negative outlook on the country’s ratings, meaning it could fall further in the near future. This action highlights how the real sovereign debt crisis is in Europe not in Dubai.
The ratings agency said:
The downgrade reflects concerns over the medium-term outlook for public finances given the weak credibility of fiscal institutions and the policy framework in Greece, exacerbated by uncertainty over the prospects for a balanced and sustained economic recovery.
Icelandic-style violence erupted in Greece on the anniversary of the death of a boy at the hands of Greek police. The combination of this tragedy, a deep recession, and a spiralling budget deficit now expected to reach 12% of GDP is ripping at the fabric of Greek society. Some are using this as an excuse to promote anarchy; just yesterday protesters stormed the Senate and hoisted an anarchist flag in place of the Greek national one. However, clashes in Athens have as much to do with the desperate economic situation as anything else, as a boy in the video below recounts.
Greece has the economy worst affected by the credit crisis in the Eurozone economy. Many speculators have looked to it as the next domino in the wake of troubles in Dubai. If there is any contagion from the events in Dubai, expect it to pop up here where credit default swap rates and spreads to German government debt have soared and bank shares have plunged.
In February, Niels Jensen noted that Greece’s long-term fiscal outlook is even more worrying than the near-term outlook given unfunded liabilities there.
Another issue, which is potentially even more destabilising for the euro longer term, is the massive liabilities facing Europe as its population ages. We have borrowed table 2 below from Goldman Sachs which makes no secret of the challenges facing a number of European countries. Greece is clearly facing the biggest challenge. Public debt, which currently stands at about 95% of GDP, will grow to a whopping 555% of GDP by 2050 if the current pension and social security programme is left unchanged. The Greek government is painfully aware of this and have been working on several new initiatives. It was the passing of one of those new laws which caused the riots in Athens before Christmas.
These issues are now re-surfacing and threaten to derail an incipient economic recovery. Greece bears watching given the potential for contagion if things do sour there. Other markets to watch for contagion are Spain, Portugal and Ireland as they are all part of the Eurozone and do not have control over monetary policy as a tool to fight a downturn.