Public Intelligence

Members of an European Union and International Monetary Fund delegation walk past a beggar as they leave the Finance Ministry building in central Athens on Monday, June 14, 2010. The officials arrived in Athens Monday for an interim review of Greece's efforts to pull itself out of a major debt crisis that pushed it to the brink of default. The delegation will stay in Athens for the week. (AP Photo/Petros Giannakouris)

Greek Government Bonds Decline After Debt Downgraded to Junk (Bloomberg):

The bonds of so-called peripheral euro-region nations, including Greece, Ireland and Spain, fell relative to benchmark German bunds after Greece’s credit rating was cut to junk by Moody’s Investors Service.

German government bonds rose as investors shunned all but the safest assets following the downgrade and Citigroup Inc. said Greek debt will now be removed from some indexes. The ranking was lowered four steps to Ba1 from A3 by Moody’s, which cited “substantial” risks to economic growth from austerity measures tied to a 110 billion-euro ($134.5 billion) aid package from the European Union and the International Monetary Fund. The lower rating “incorporates a greater, albeit, low risk of default,” the ratings company said in a statement yesterday in London. The outlook is stable, it said.

“There’s a lot of forced selling as Greek bonds fall out of indexes, and if you’ve got to sell, you’ve got to sell,” said Harvinder Sian, a senior bond strategist at Royal Bank of Scotland Group Plc. “The European Central Bank is the only buyer for peripherals as contagion takes hold.”

The bund yield fell three basis points to 2.61 percent as of 9:02 a.m. in London. The 3 percent security due July 2020 rose 0.24, or 2.4 euros per 1,000-euro ($1,218) face amount, to 103.41. Two-year yields dropped one basis point to 0.49 percent.

The premium that investors demand to hold Greek 10-year bonds over benchmark German bunds widened 35 basis points to 605 basis points. The so-called yield spread between Irish and German 10-year bonds widened 19 basis points to 283 basis points, while the Spanish spread widened six basis points to 210 basis points.

Moody’s downgrades Greek debt to junk status (AP):

Moody’s Investors Service on Monday slashed Greece’s credit rating to junk status as a delegation from the International Monetary Fund and the European Union started an interim review of the country’s efforts to pull itself out of a major debt crisis.

A Moody’s statement said it was cutting Greece’s government bond ratings by four notches, to Ba1 from A3, with a stable outlook for the next 12 to 18 months. It was the second of the three major agencies to accord Greek bonds junk status since Standard & Poor’s did the same in late April.

The downgrades reflects concern that the country could fail to meet its obligations to cut its deficit and pay down its debt.

After amassing a vast public debt and overspending that sent its budget deficit spiraling to 13.6 percent of gross domestic product in 2009, Greece was saved from defaulting on its loans in May by the first installment of a joint EU-IMF 110 billion euro ($134.5 billion) bailout. It is to receive the second installment in September.

“The Ba1 rating reflects our analysis of the balance of the strengths and risks associated with the Eurozone-IMF support package,” said Sarah Carlson, Moody’s lead analyst for Greece.

“The package effectively eliminates any near-term risk of a liquidity-driven default and encourages the implementation of a credible, feasible and incentive-compatible set of structural reforms, which have a high likelihood of stabilizing debt service requirements at manageable levels,” Ms. Carlson said.

“Nevertheless, the macroeconomic and implementation risks associated with the program are substantial and more consistent with a Ba1 rating,” she added.

In return for the rescue loans, Prime Minister George Papandreou’s center-left government announced painful austerity measures, slashing pensions and salaries while increasing indirect taxes, seeking gradually to bring the deficit down to 2.6 percent in 2014.