Fisher Investments Editorial Staff
Media Hype/Myths, Developed Markets, Market Risks

Greek Prologue

By, 03/07/2011

Story Highlights

  • Moody’s further downgraded Greece’s debt rating Monday, citing continued risks due to doubts surrounding the country’s ability to service its debt.
  • Moody’s announcement is unlikely to impact Greece or the rest of the world much—Greece’s troubles are now (and have been) well known for some time.
  • Despite the PIIGS (and Greece in particular), the eurozone’s economy did grow—expanding 1.7% in 2010.
  • Looking forward, what’s important is to watch for larger decisions regarding the long-term future of eurozone.

Greece’s debt saga continued Monday as ratings agency Moody’s downgraded the country’s debt rating from Ba1 to B1, calling it “highly speculative.” Among other reasons, Moody’s stated that Greece is having a tough time collecting taxes to raise the required revenues to reach austerity goals. And even if it does, Moody’s believes Greece’s austerity measures won’t be enough to allow it to service its debts unassisted after 2012—when the €110 billion bailout package from the EU and International Monetary Fund (IMF) approved last May concludes.

Meanwhile, the European Union (EU) hasn’t been clear what sort of help Greece will get in 2013 and beyond. At the recent round of EU council meetings, some sort of permanent bailout effort was discussed and appears to be in the works, but many details have yet to be ironed out.

If Moody’s report doesn’t seem surprising, new, and earth-shattering, it’s largely because it’s not—Greece’s troubles are now (and have been) well known. And as we’ve said before, ratings agencies are frequently late to the game—they seemingly have a nose for sniffing out what’s rather obvious already (like announcing Monday that current political turmoil in North Africa could impact regional economic growth—a fact that’s likely well appreciated already).

Still, try as they might, as we’ve said here frequently, Greece and the other PIIGS aren’t succeeding in dragging the overall European Economic and Monetary Union (EMU) down—slowing them a bit, maybe, but not drowning them. European Central Bank (ECB) president Jean-Claude Trichet recently said, “Global growth is confirmed…at a relatively robust pace.” Indeed. The EMU overall grew 0.3% in Q4 2010 and 1.7% for 2010 overall (compared to a 4.1% contraction in 2009).

But note: That growth wasn’t across the board. Greece is at the weak end of a 17-speed economy, with Germany (the biggest European economy) setting the pace. To highlight the difference: While the Greek economy struggles, Germany’s economy is facing its lowest unemployment numbers since reunification and policymakers there are more concerned with inflation resulting from hot economic growth than they are with actual growth itself. So when Trichet spoke recently of the potential for an ECB rate hike, he was speaking words likely welcome to Germans, but not Greeks. Which is an excellent description of the eurozone’s present challenge: How do policy makers deliver clarity and a plan that can simultaneously serve the needs of Germany and Greece alike? And everyone in between? It is this essential question leaders must address in the run up to 2013’s bailout expiration.

Greece’s debt woes and economic situation make good fodder for a written tragedy (and ratings agency reports, apparently), but in reality, Greek news is more a prelude to some larger decisions about the long-term future of the eurozone.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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