Greece and Portugal faced with 'slow death' by debt burden
Published 14/01/2010 | 05:00
THE Greek and Portuguese economies may face a "slow death" as they dedicate a higher proportion of wealth to paying off debt and investors demand a premium to hold their bonds, credit rating agency Moody's Investors Service said yesterday.
While the two countries can still avoid such a scenario, their window of opportunity "will not be open indefinitely", Moody's said in a report.
Portugal, with a negative outlook on its Aa2 rating, has more time "to reverse this trend" while Greece "has significantly less time." Moody's cut Greece's rating to A2 from A1 on December 22.
The premium that investors demand to hold Greek debt instead of German equivalents is six times more than it was two years ago. The spread has doubled since 2008 in the case of Portugal but, at 0.7pc, is considerably less than Ireland's 1.5pc or Greece's 2.4pc.
The risk of "sudden death" in the form of a balance-of-payments crisis, from the countries buying more abroad than they sell, was "negligible", the ratings agency said.
But the two countries face "downward ratings pressure, now that they must implement politically difficult fiscal retrenchment if they are to avoid an inexorable decline in their debt metrics".
Moody's believes, however, that stronger eurozone countries would probably help weaker ones that run into trouble.
"We find it hard to believe that member states facing extreme liquidity conditions would be denied the helping hand that European banks and corporations benefited from during the global financial crisis," it said.
In 2010, European credit ratings "will likely be scrutinised even more closely than usual" amid uncertainty over how governments move to reduce back stimulus measures and spur growth.
European governments with Aaa ratings, which include Britain, "seem secure at the moment, with all having stable outlooks", the report said.
The ratings of countries that "stay the course of reform" even though it is painful and takes time, will also be safer, the report said, but higher interest rates pose a threat to more indebted countries (such as Ireland).
If concerns about inflation prompted market interest rates to rise significantly, higher debt costs may mean "more highly indebted countries could find their ratings tested", Moody's said.
The debt burdens of the UK and Ireland will amount to around 80pc of Gross Domestic Product this year, Italy's will rise to 117pc and Greece's to 125pc, according to forecasts. (Bloomberg)