COMMON SENSE

AFP – Wednesday, December 9

PARIS (AFP) – – The Fitch rating agency on Tuesday downgraded Greece’s long-term debt ratings as well as those on four of the country’s largest banks, describing prospects for Greek public finances as negative. Tuesday’s action was a fresh blow to Greece, saddled with high public deficits and debt, as it came a day after another agency, Standard and Poor’s, placed Greek debt under “negative” watch and warned of a downgrading if the government did not rein in its overspending.

The moves by the agencies rattled European markets, with the Athens exchange closing more than 6.0 percent in negative territory.  Markets fell elsewhere in Europe, which analysts partially attributed to nervousness over the Greek situation.  In Brussels the European Union’s Executive Commission urged the Greek government to take “more measures” to reduce its crippling deficit.  “A difficult situation in one euro-area member state is a matter of common concern for the euro area as a whole,” warned outgoing European Union economic and monetary affairs commissioner Joaquin Almunia in a statement.

“It is clear that Greece faces very substantial economic and fiscal challenges… but more measures are required,” he added.  Tuesday’s developments placed the eurozone under new strain because they put Greek debt in a danger zone regarding requirements by the European Central Bank for bonds it will accept as collateral when banks seek short-term funds.

Fitch said that while the four largest banks were likely to perform “adequately” in the fourth quarter this year and in 2010, “there is a high risk that Greece’s weak fiscal position, which mainly caused the sovereign rating downgrade, could accentuate the deterioration of the economy.” “Given the poor historical track record of public finance management, Fitch is not convinced that the substantive pension reform and other measures necessary to contain public spending pressures and broaden the tax base will be sufficiently strong to materially reduce debt.” But the national debt was likely to rise to 130 percent of output before stabilization.