Standard & Poor’s lowered Greece’s rating by one notch to single A last month. It was widely expected after the country was put on credit watch in July. The agency said the government lacked a clear plan to reduce its heavy debt burden.
Yield spreads on Greek government bonds widened by about one basis point on news of the downgrade but the gap had closed to about half a basis point in trading the next day.
“We’re lucky,” said one analyst. “Since Greece is a member of the eurozone, the perception is that there’s virtually no default risk.”
With Greek bonds consistently offering yield spreads of around 18 basis points over German bunds, the appetite among buyers remains strong.
One Athens-based trader said: “It helps that liquidity in Greek 15-year-bonds is among the highest of the eurozone issuers.”
The centre-right government, which came to power in March, revealed Greece’s budget deficit had exceeded the eurozone stability pact’s ceiling of 3% of GDP every year since 2000.
The finance ministry has pledged to improve fiscal discipline next year by curbing public sector wage increases and cutting investment. The deficit is expected to fall from a projected 5.3% to 2.8% of GDP next year.
Greece’s debt is predicted to exceed 110% of GDP this year – the second highest level in the eurozone. It has a sizeable public borrowing requirement of around E33bn in 2005, according to budget estimates.
The finance ministry has focused on bringing the deficit in line with the stability pact requirement and is assessing the true size of the debt.
“A considerable amount of debt was kept off the balance sheet under the previous government,” said one senior official.
Short-term measures to reduce debt include last month’s sale of a 7.5% stake in the National Bank of Greece, the country’s biggest bank, through an international placement that raised over E550m.
The government is also preparing a medium-term privatisation programme to bring debt below 100% of GDP by 2007.
