The rating downgrade announced by Moody’s today is completely unjustified as it does not reflect an objective and balanced assessment of the conditions Greece is presently facing. Furthermore, its timing and the multi-notch nature of the downgrade are incomprehensible and raise a number of questions.

Moody’s focuses its analysis exclusively on the downside risks and while mentioning the significant progress Greece has made in the implementation of its fiscal consolidation and structural reforms programme it does not actually incorporate in its analysis and ratings decision their upside impact on the economy.

The arguments made can in no way be justified by the additional information available since Moody’s last downgrade in June 2010 and the progress achieved since. Instead, the announcement also anticipates the failure of specific policies – while a large number of reforms have already been implemented - including those relating to decisions at the European Union level that have not yet been taken and while critical discussions are ongoing before the March European Council meeting.

Specifically, the first reason that Moody’s cites to explain the downgrade is the scale of Greece’s structural reform programme and implementation risks it entails, both of which were well-known since May 2010 when the agreement with the EC/ECBIMF was signed. In the nine months since then Greece has showed its determination in both fiscal consolidation and in implementing reforms on an extraordinary scale. The reduction in the budget deficit by 6 percentage points of GDP and the primary deficit by more than 7 percentage points of GDP in 2010 are the strongest evidence that relative to last year the risk of sovereign default has not increased but rather decreased as Greece is on an bold path towards fiscal consolidation.  

 

Furthermore, Moody’s announcement refers to the delay in the rebounding of budget revenues, yet does not take into account the increase in revenues of nearly 6% of GDP following the execution of the 2010 Budget despite GDP receding by 4.5% the same year. Moody’s continues further in anticipating the failure of policies that either have not been voted on yet - like the draft Tax Bill that is currently in Parliament – or are in the very early stages of implementation.

Finally, Moody’s refers to uncertain conditions in the Eurozone after 2013 and their impact on Greece’s debt, at a time when the European Union and the Eurozone are still formulating their policies and there is an explicit commitment from Member States to agree on a comprehensive solution to the crisis at the European Council in March.  Moody’s explanation ignores completely the Eurozone Member States’ unequivocal and united expression of continued support for the sovereigns that face difficulties in accessing capital markets.

It should be noted that the progress made in the Greek Economic Policy Programme in terms of both fiscal consolidation and structural reforms is rigorously assessed every quarter by the European Commission, the IMF and the ECB. The latest review which was completed only very recently showed the programme is on track and in no way can be seen to lend support to the unjustified and unbalanced conclusions reached by Moody’s rating agency.

Ultimately, Moody’s downgrading of Greece’s debt 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.  At a time when the global economy is fragile and market sentiment is sensitive, unbalanced and unjustified rating decisions such as Moody’s today can initiate damaging self-fulfilling prophecies and certainly strengthen the arguments for tighter regulation of the rating agencies themselves.

Moody’s decision in no way affects the financing of the Hellenic Republic as it continues to draw funds from the Greek support mechanism. Moreover, Greece, in collaboration with the European Central Bank, the European Commission and the International Monetary Fund, has taken all necessary measures to maintain the stability and liquidity of the Greek banking system.