Ratings agency Moody’s has decided to downgrade the status of Greek debt to “highly speculative”; changing the rating from Ba1 to B1. According to Moody’s, the move is justified because of problems caused by “endemic tax evasion” a “very ambitious” austerity plan and concerns that the EU may force Greece to restructure its debts after the bailout contingency ends in 2013. Naturally enough, Greece was not best pleased by the move – probably with some justification.
The challenges that have faced Greece over universal tax collection have been known for many years and consequently is nothing new. It would be reasonable to assume that ratings agencies had already factored this into their assessment. Similarly, the austerity measures were widely regarded as essential to afford Greece any credibility in tackling her debt problem which lay at the heart of the initial sovereign debt crisis. The Greek government needed to push through an ambitious austerity plan to satisfy both the EU and the IMF and qualify for the bailout – the move was very unpopular at home, provoking civil unrest and widespread strikes. Lastly, if Greece continues to meet IMF/EU targets for dealing with its borrowing, the EU is highly unlikely to restructure Greek debt because of the knock-on effect that this would have on the Euro.
The Greek finance minister reacted angrily to the move, stating that: "ultimately, Moody's downgrading of Greece's debts reveals more about the misaligned incentives and the lack of accountability of credit rating agencies than the genuine state or prospects of the Greek economy. Having completely missed the build-up of risk that led to the global financial crisis in 2008, the rating agencies are now competing with each other to be the first to identify risks that will lead to the next crisis." You have to admit that he has a point.