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Lower Debt Ratings Seen In Europe

Written by A Forex View From Afar on Sunday, January 18, 2009

The economic situation in many developed countries is starting to become tougher and tougher, requiring the government to raise cash from private investors to funds its expenses. However, raising debt together with today’s uncertainty, regarding the economic future and prospects, makes some ratings companies cut the debt rating lower.

Greece had its sovereign debt (government bond) rate cut down by S&P today, one grade lower, to A-, but with a stable outlook. Currently, Greece holds the lowest rating from the Euro-area according to the S&P’s rating system. Using the Fitch’s rating system, Greece holds an A investment grade, also with a stable outlook. According to the Fitch’s grades, only Cyprus has a lower debt rating than Greece.

The debt ratting system is very useful for investors, helping them gauge the default risk of a bond issuer. As such, a lower yield means that Greece would have to pay more for its debt. Among other things, the immediate implication of this decision is that the yield spread between the members countries of the Euro-area will further increase. Some say, this may create tensions in the Euro-area, as some countries would have easier and cheaper access to debt than others.

Also in Europe, Spain and Portugal face a similar situation. Both countries are threatened with downgrades from the main rating agencies. Spain faces a severe crisis currently, generated by a large housing bubble. In the last few months, the unemployment rate rose from 9% to 13% in Spain, currently the highest rate from the Euro-area.

Usually, a lower debt rating should affect the euro, since this means investors will be less tempted to send money into the Euro-area. Nevertheless, it also should be noted that, the same agencies initially rate the U.S. mortgage debt with AAA, the highest a bond can get. That AAA debt is now sitting at the heart of the credit crunch, much of it being seen as toxic debt.

Euro-area debt rating

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