By: Mike Campbell
Ratings agency Standard and Poor’s (S&P) decided to downgrade the credit worthiness of Eurozone member Greece to “junk” status. This means that the ratings agency believes there is a significant risk that investors in Greek government bonds may lose all or part of their investment due to the government defaulting on its loans.
The IMF, the Eurozone nations and the Greeks themselves have expressed confidence that Greece will honour its debts. Indeed, until as recently as Friday, Greece intended to do this by raising capital in the market, but the costs have become prohibitive. A 2-year government bond would attract a yield of 0.8% if it were German; 1.2% if British, but Greek debt is priced at 15% right now. As a result of the S&P move, confidence in stock markets around the world has taken a hit. In Europe, the FTSE was down by 2.6% and the CAC was off by 3.8%; in America the Dow Jones lost almost 2% and in Asian trading, the Nikkei was down by 2.6% and the Hang Seng was off by 1.3%. The world’s financial system got us into the mess of the global recession and major segments of it only survived with help from the tax payer. It seems that nervousness in the financial markets can still lead to substantial losses in stock values. Hopefully, stronger nerves will develop and the current down trend will be short-lived. The S&P move was enough to send the Euro down against the Dollar to levels not seen for more than a year. Details of the final EU/IMF package have yet to emerge, but clearly a strong signal needs to be sent to allay market fears and ward off the spectre of a double dip recession triggered by market jitters.