Standard & Poor’s Ratings Services has lowered its long-term sovereign credit rating on Greece to ‘CCC’ from ‘CCC+’. The ‘C’ short-term rating is unchanged, and the outlook is negative.
Greece’s rating was already in the ‘Speculative’ grade and this downgrade to CCC means it is classed as: “Currently vulnerable and dependent on favourable business, financial and economic conditions to meet financial commitments.”
S&P gave its rationale for the decision as follows: “As its liquidity position continues to deteriorate, Greece appears to be prioritising other spending items over debt servicing. In our view, without a turnaround in the trajectory of nominal GDP and deep public-sector reform, Greece’s debt is unsustainable. The downgrade reflects our view that in the absence of an agreement with its official creditors, Greece will likely default on its commercial debt within the next 12 months.”
Moreover, with tax payment arrears rising in May and the government apparently conserving cash by delaying payments to suppliers, S&P is negative on the prospects for Greece even if a short term fix is negotiated. “A weakening underlying fiscal position raises questions about the realism of any agreement with Greece’s creditors on fiscal targets, as projections for tax receipts and real and nominal GDP appear speculative. Even if an agreement with official creditors were to be reached over the next fortnight, we do not expect that such an agreement would cover Greece’s debt service requirements beyond September.”
Austerity, by taking demand out of the Greek economy, has shrunk It at a time when government should have been supporting demand.
If you’d like to know why it does not make sense to run a government budget along the same lines as a household budget watch this video by economist Professor Steve Keen.