April 24, 2024

A Downgrade by Fitch Leads to a Decline in Greek Bonds

Greek bonds led declines among euro area nations on Friday on concern a restructuring of its debt would reignite Europe’s sovereign debt crisis.

The spread, or yield difference, between benchmark Greek debt and German bunds widened to the most on record.

Fitch Ratings said that it downgraded Greece’s credit ratings by three levels, to B+ from BB+, four notches below investment grade.

German bonds rallied as Jens Weidmann, the president of the Deutsche Bundesbank and a member of the European Central Bank’s governing council, said the bank might no longer be able to accept Greek bonds as collateral if maturities were extended, stoking demand for the relative safety of Europe’s benchmark debt.

“I see the downgrade as a response to the continued deterioration of Greece’s fiscals and the need for further significant austerity measures,” said Peter Chatwell, a fixed-income strategist at Crédit Agricole in London. “The decision is not a great shock, although I’m sure the timing is unhelpful for many as the market has already slid quite strongly today.”

The prime minister of Luxembourg, Jean-Claude Juncker, this week proposed “reprofiling” Greek debt maturities as a way of limiting the losses of private bondholders.

European Central Bank officials opposed the idea, with an executive board member, Jürgen Stark, saying any form of restructuring would be a catastrophe for the banking system. Another board member, Lorenzo Bini Smaghi, said a solution for reducing debt “but not paying for it will not work.”

Ioannis Sokos, an interest-rate strategist at BNP Paribas in London, said a reprofiling of the debt appeared to be inevitable. “It’s not a matter of if there’s a reprofiling. It’s a matter of when and how significant it is.”

Meanwhile, the International Monetary Fund said Ireland’s ability to sell sovereign bonds remains “elusive” and its situation may worsen unless the European Union develops a more comprehensive plan to deal with the region’s debt crisis.

Ireland’s plan to stabilize its banks and reduce its deficit is “off to a strong start,” the fund said in a review on Friday of its aid agreement with Ireland. “This decisive approach to program implementation, which should be supported by a more comprehensive European plan, offers the best prospect to overcome market doubts.”

Ireland received an 85 billion euro ($121 billon) bailout in November, led by the European Union and I.M.F., as bank rescue costs related to a real estate collapse led to a mounting fiscal deficit. It was the second euro region nation to get aid after Greece last May, and bond yields have jumped since Portugal sought aid last month.

“Notwithstanding the strong policy implementation, risks to the program have risen in some respect,” said Ajai Chopra, deputy director of the I.M.F.’s European department. “Financial market conditions are more adverse, with spreads at unsustainable levels. This is due to external developments.”

He said there was a need for an “upgrade” to the European Financial Stability Facility to deal more comprehensively with problems, and that fixing Ireland’s banks would be assisted by a medium-term European Central Bank funding plan.

“We hope that such financing will be available” as Ireland sticks to bank-deleveraging targets, he said.

Irish bond yields have jumped in the last month. The spread between Irish 10-year yields and German bunds was at 741 basis points Friday. That compares with 594 basis points on April 6, the day Portugal said it would seek aid. The Greek premium was at 1,344 points.

“Deepening financial stress for other euro area periphery countries presents a critical yet largely exogenous risk that needs to be addressed through a more comprehensive European plan,” the I.M.F. said.

The fund also said Ireland’s 2011 growth outlook was “moderately weaker” than when the aid package was approved. Exports will be the main driver of growth as domestic demand “will continue to face headwinds,” it said.

“A continued inability to regain market access for the sovereign, and hence for the banks, would impede growth,” the I.M.F. said.

Article source: http://feeds.nytimes.com/click.phdo?i=0975703da83aa19cb7378851a35af0d0