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Moody’s Says Greece, Portugal May Face ‘Slow Death’ (Update1)
By Emma Ross-Thomas
Jan. 13 (Bloomberg) --
The Portuguese and Greece economies may face a “slow death” as they dedicate a higher proportion of wealth to paying off debt and investors demand a premium to hold their bonds, Moody’s Investors Service said.
While the two countries can still avoid such a scenario, their window of opportunity ”will not be open indefinitely,” Moody’s said in a report today from London. Portugal, with a negative outlook on its Aa2 rating, has more time “to reverse this trend” while Greece “has significantly less time.” Moody’s cut Greece’s rating to A2 from A1 on Dec. 22.
The premium that investors demand to hold
Greek debt instead of German equivalents is six times more than it was two years ago, and the spread has doubled since 2008 in the case of Portugal. Greece had the largest
budget deficit in the euro region last year, more than four times the European Union limit of 3 percent of gross domestic product. Portugal’s debt load will account for 85 percent of GDP this year, according to the European Commission.
The risk of “sudden death” in the form of a balance-of- payments crisis was “negligible,” the ratings company said in the report. Still, the two countries face “downward ratings pressure now that they must implement politically difficult fiscal retrenchment, if they are to avoid an inexorable decline in their debt metrics.”
Yields Jump
The yield on the 10-year Greek bond jumped 9 basis points to 5.75 percent as of 12:10 p.m. in London, pushing the spread to 242 basis points, the most in 2 1/2 weeks. The yield on Portugal’s benchmark 10-year bond rose 2 basis points to 4.01 percent, leaving the spread with Germany to 69 basis points. A basis point is 0.01 percentage point.
The Greek and Portuguese governments may be forced to raise taxes, hurting investment and prompting emigration, according to the report. Still, stronger euro-region countries would probably help weaker ones that run into trouble.
“We find it hard to believe that member states facing extreme liquidity conditions would be denied the helping hand” that European banks and corporations benefited from during the global financial crisis, Moody’s said in the report.
In 2010, European ratings “will likely be scrutinized even more closely than usual” amid uncertainty over how governments move to dial back stimulus measures and spur growth. European governments with Aaa ratings “seem secure at the moment, with all having stable outlooks,” according to the report.
Swelling Debts
The euro-area economy returned to growth in the third quarter, emerging from the worst recession in six decades, after governments spent billions of euros to rescue banks and boost demand. The region’s debt burden as a proportion of GDP will swell to 84 percent this year from 66 percent before the crisis, the European Commission forecasts, and governments have yet to clarify plans for paying that down.
Governments that implement successful strategies to rein in stimulus measures will have more “secure” ratings than those that don’t, Moody’s said. The ratings of countries that “stay the course of reform” even though it’s painful and takes time, will also be safer.
Another risk to ratings could be posed by higher interest rates, Moody’s said. The European Central Bank cut its benchmark rate to a record low of 1 percent while the Bank of England slashed its rate to 0.5 percent and is buying as much as 200 billion pounds ($325 billion) of bonds to stimulate lending.
If concerns about inflation prompted market rates to rise significantly, higher debt costs may mean “more highly indebted countries could find their ratings tested,” Moody’s said.
The U.K.’s debt burden will amount to 80 percent of GDP this year, Italy’s will rise to 117 percent and Greece’s will be 125 percent, according to the commission’s forecasts.