Greece sees credit rating cut by S&P

With the economy weakening significantly around the globe, the budgets of sovereign nations are coming under increased pressure.  As a result S&P has put a number of countries under review for potential credit downgrades.  However, now, the first actual cut is in:  it is Greece.

Greece on Wednesday became the first western European economy to have its credit ratings downgraded since the credit crisis blew up in August 2007, because its high levels of public and private debt.

Standard & Poor’s moved swiftly to cut the country’s credit ratings after warning of a possible downgrade only five days ago. The euro fell sharply against the dollar, while the gap between Greek and German bond yields rose to fresh record highs.

Marko Mrsnik, S&P analyst, said: ”The global financial and economic crisis has, in our opinion, exacerbated an underlying loss of competitiveness in the Greek economy.”

Greece’s sovereign credit ratings were downgraded from A, which is five notches below the top triple-A rating, to A-minus.

S&P’s decision follows its recent warnings to Spain, Portugal and Ireland that their credit ratings could be downgraded because of their deteriorating public finances.

Earlier on Wednesday, problems mounted for Greece and other so-called peripheral eurozone economies on reports that Ireland was planning to seek help from the International Monetary Fund.

The report sent bond spreads between Germany and the rest of the eurozone to fresh highs since the launch of the single currency in January 1999.

Credit default swaps – a form of insurance against bond defaults – of the peripheral nations also rose sharply, implying the economies of these countries are increasingly in danger of defaulting.

The crux of the problem here is the Euro. The Euro is a currency that spans 16 nations now, including recent Euro entrant Slovakia. When an economy tanks, the currency is an escape valve that is vital but that is now unavailable to the Eurozone’s worst hit economies. In my view, the UK and Switzerland are in a much better position than, say, Ireland precisely because they control their own currency — and their own money printing presses.

So, yes, many want in to the Eurozone to prevent the battering that Iceland took.  But, the Euro is not the salve for all ills.  Monetary union causes as many problems as it solves.  As I see it, staying out of the Euro was the best thing Gordon Brown accomplished as Chancellor.