Sliding Greece

We’ve been watching Greece teeter on the brink for what now seems like an eternity. In another trend, we’ve been watching Fitch attempt to get tough with its ratings, in an effort to brand itself as the good rating agency.

Both trends continued today, as Fitch downgraded Greece’s debt rating to BBB+. The Hellenic Republic now has the distinction of being less credit worthy than Malaysia, and has the same rating from Fitch that Libya has. Libya, at least, is on a “stable” outlook, while Greece is still “negative”.

However, the most important factor is that Greece’s debt is Euro-denominated, and that it has issued debt in a currency that it cannot control. Unlike the United States, which has trillions of dollars of debt but can more or less print up dollars to repay debts, Greece will simply be depending on the goodwill of a Germany-controlled Central Bank to ease its debt burden.

ECB President Jean-Claude Trichet on Monday said Greece’s debt situation calls for “very courageous measures” but said he was confident the recently-elected Socialist government would take appropriate measures.

MarketWatch (emphasis added)

I suspect Trichet is more hopeful than confident. Still, a quick look at a blog post here from 11 months ago shows that Greek bonds have been worse off in relation to Germany’s now “benchmark” bond – a dangerous development in itself. The same MarketWatch article contains the phrase “core euro-zone countries” to distinguish the “respectable” (Germany, France, Austria…) Euro countries from their “riskier” counterparts (Italy, Greece, Portugal, and Ireland).

We can only marvel at the events surrounding the Euro. Since 1999, the Euro has been supplanting nearly all European currencies, and yet, it’s inherent weakness is its success. It has been so successful that a fault line has developed that threatens the entire Euro experiment, as it enveloped countries with habits for running up huge deficits, and letting inflation erode them – a mentality altogether un-German.

(Euro Stress sidebar updated with a 221 basis spread)