“My longer term concerns on Greece remain, namely my doubt whether the domestic political and social fabric can withstand the reforms that are needed to simultaneously cut the deficit while restoring growth,” Erik Nielsen, chief European economist at Goldman Sachs, wrote in a note to clients.
Under the burden of government debt now estimated to be 124 percent of the country’s gross domestic product, Greek leaders are working on economic reforms that would raise taxes, cut government wages, rein in pension costs, and privatize government-held firms such as banks, utilities and telecoms.
By Peter Whoriskey and Dina ElBoghdady
Washington Post Staff Writer
Wednesday, April 28, 2010; A01
A leading credit agency lowered Greece’s rating to junk status, dealing a blow to an international rescue plan for the country and hammering U.S. and European stock markets.
The junk rating, unusual for a developed nation, deepened fears that big fiscal deficits and debt burdens elsewhere could threaten the economic recovery in Europe. Stock markets on both sides of the Atlantic tumbled about 2 percent or more after the downgrade by Standard & Poor’s.
The downgrade fanned investors’ doubts that the proposed economic reforms in Greece will go far enough to prevent the country from spiraling into even deeper trouble. It also presented a new obstacle to the planned $60 billion bailout from European governments and the International Monetary Fund.
The Dow Jones industrial average lost 1.9 percent to 10,991.99, while the broader Standard & Poor’s 500-stock index fell 2.3 percent to 1183.71. They were the biggest one-day losses in more than two months. The sell-off spread to Asia Wednesday, with Japan’s Nikkei average down more than 2 percent in early trading.
The junk rating and investor skepticism make it harder for the country to finance its debt because they raise the interest rates it is charged. They also put pressure on the Greek government to carry out promised fiscal reforms despite determined political opposition.
“I am determined to do whatever it takes, when it is needed, to revive our country,” Prime Minister George Papandreou told parliamentary deputies Tuesday. “It’s now or never — but we will succeed.”
The credit agency on Tuesday also downgraded the rating of Portugal, another country in which the government faces a mountain of debt. Portugal’s rating is still investment grade.
The two downgrades raised concerns that turmoil could arise elsewhere. A number of countries must work themselves out from under staggering debt burdens, and the possibility that any one of them could default has made investors skittish.
“Most advanced industrial countries in worst ever peacetime fiscal shape,” a report from Citigroup warned this week. Although the risk of defaults outside Greece was still low, it said, efforts to balance government budgets “will be a drag on growth for years to come for advanced industrial countries.”
Standard & Poor’s dismissed the suggestion that its announcement caused the turmoil Tuesday. Indeed, the strain on Greece’s finances were apparent Monday when investors sharply drove down the price of Greek bonds, effectively raising interest rates.
“Ratings just hold a mirror up to nature,” said John B. Chambers, chairman of S&P’s sovereign rating committee. “The fate of Greece is in the hands of the policymakers.”
Under the burden of government debt now estimated to be 124 percent of the country’s gross domestic product, Greek leaders are working on economic reforms that would raise taxes, cut government wages, rein in pension costs, and privatize government-held firms such as banks, utilities and telecoms.
A central question is whether the government will be able to enact the reforms.
Mounting anger over tax increases and public sector pay cuts erupted Tuesday when Greek transportation workers went on strike and rallied in the streets of Athens, warning, “Hands off our salaries,” according to Reuters. Bus and metro train service came to a halt for six hours.
That protest was followed by another where 2,000 people, including students, marched to Parliament and with red flags and “Out with the IMF” banners in hand, expressing outrage about the Socialist administration’s request for financial aid from the IMF and European Union, Reuters reported.
The public outcry is expected to spill over into next week, when two large unions, representing 2.5 million workers, are expected to march to protest deficit cutting measures.
In the first poll taken since Greek officials formally asked for the aid package Friday, a majority of Greeks — nearly 61 percent of 1,400 people surveyed — said they disapproved of the government’s decision, news agencies reported. More than 67 percent said they feared that anger about cutbacks tied to the debt crisis would lead to social unrest, according to Greek Public Opinion, which conducted the survey.
Despite the protests, Greek officials on Tuesday rushed to calm investors after the S&P downgrade and reassert their commitment to an austerity program. “Everyone now understands that there is no more time for delay,” Greek Finance Minister George Papaconstantinou said on television
He said that the idea of Greece restructuring its debt — not paying it off in full — is “outside every negotiation” and that Greece will “absolutely and without any doubt” repay that debt.
Several analysts said that while Greece is making progress that bodes well for the near future, the long term is less assured.
“My longer term concerns on Greece remain, namely my doubt whether the domestic political and social fabric can withstand the reforms that are needed to simultaneously cut the deficit while restoring growth,” Erik Nielsen, chief European economist at Goldman Sachs, wrote in a note to clients.
The rising interest rates the Greek government faces create the risk of a financial death spiral. The country must now refinance more than $10 billion in bonds that mature May 19. But the higher rates make it that much harder for the nation to meet its obligations, which in turn cause investors to demand even higher rates.
Investors view Greek debt as so risky that Tuesday they demanded a 15.4 percent interest rate for two-year bonds — up from 13.2 percent Monday and 5.1 percent in early April. Rates also spiked Tuesday on the government debts of other countries with sizable obligations: Portugal (up 0.8 percentage points for two-year bonds), Ireland (up 0.5 percentage points) and Italy (0.3 percentage points).
The situation in Greece has also raised a debate among the European governments offering the aid package over how harsh and immediate the fiscal reforms should be. German officials have demanded reforms that others have suggested are too severe.
The calls for Greece to make drastic budget cuts as a condition of receiving aid seems unrealistic, said Kevin Giddis, president of fixed-income capital markets at Morgan Keegan.
“What Germany and the E.U. are missing is that the house is already on fire,” Giddis said. “It’s too late to install the smoke alarm when the house is already burning.”
Staff writer Neil Irwin contributed to this report.