Of Greece, the EU and high-stakes financial chicken

February 25, 2010

Fitch, one of the big three credit ratings agencies, has made some positive noises on behalf of Greece, briefly bucking the onslaught of negative comment.

Speaking in an interview with Reuters,  a Fitch analyst said there was no reason to cut the country’s credit rating from its current BBB+ just yet,  although he was keeping a very close eye on the situation and maintaining a negative outlook.

That should have given the eurozone, so worried about the potential implosion of one of its members’ sovereign debt markets, cause to breathe more easily, at least briefly.

But the analyst added a comment that is exactly what the European Union and the 16 countries that make up the euro zone do not want to hear.

“If there was concrete EU help (for Greece), available  on certain terms known in advance, then clearly it would be a strong point for the rating,” he said.

And therein lies the rub.

Concrete EU/eurozone support for Greece — for example a guarantee that EU members would buy a fixed amount of Greece’s debt for the rest of the year — might be helpful for ratings agencies to determine that a Greek default is therefore less of a risk and the rating can be increased, but it’s precisely what could make Greece’s debt problems worse, not better.

First, it would give the markets and hedge funds, some of whom have been making a lot of money from Greece’s woes, a target to aim for. If the EU or eurozone members said they were willing to prop Greece up with, let’s say, 50 billion euros worth of support, players in the market would find ways to pressure Greece’s debt market — and those banks or institutions supporting it — up until the point that 50 billion more euros have been made and/or spent.

But it would also provide Greece with little incentive to get its house in order and correct the problems that have in large part led to the debt and deficit crisis in the first place — the so-called ‘moral hazard’ debate.

What the eurozone and EU are trying to do is make firm demands on Greece to get its act together — for example cutting the deficit by trimming the bloated state sector — while keeping their own hand hidden from the markets, by saying only that they stand ready to help Greece if needs be.

It’s a delicate balance and a very hard one to maintain. And it’s caused deep frustration in Greece, where ministers have turned around and accused the EU of being wishy-washy and poorly led, unable to take concrete decisions on how to help Athens. It’s beginning to look like a very high stakes game of fiscal chicken, with market speculators wondering whether Greece will get its finances in order first or the EU will be forced to blink and provide support first. 

The latest evidence suggests Greece’s finances have quite some way to go before they improve.

Which all goes to say that while the EU might like to hear Fitch saying that there’s no need to downgrade Greece’s credit rating again just yet, they won’t like to hear the agency adding that concrete EU measures to help Greece would somehow make the situation better.

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