Greek Fire, Part 27

The Greek Fire continues to burn, unquenchable at the heart of the euro's currency crisis.

Greece’s credit rating was cut three steps by Moody’s Investors Service, which cited the rising risk of default. Greek bonds fell and the Finance Ministry in Athens called the move “completely unjustified.”

The rating was lowered to B1, the same as Belarus and Bolivia, from Ba1 as Moody’s cited concerns that lagging tax collection and “implementation risks” would make it more difficult for the government to reach budget-cutting conditions of a 110 billion-euro ($154 billion) international bailout.

“The risk has materially increased of a default event,” said Sarah Carlson, Moody’s senior analyst for Greece said in a telephone interview from London. “Our central view is that the Greek government will achieve its objectives and it won’t need to impose losses on credits, but there are material risks to that outcome.”

EU leaders are trying to hammer out by the end of the month a package of measures to contain the debt crisis that led to bailouts last year of Greece and Ireland. Optimism that the measures would include using the 440 billion-euro European Financial Stability Facility to allow Greece to buy back some of its debt and pay lower interest rates on aid has receded with growing German resistance to the proposals.

The Greek Finance Ministry slammed the Moody’s decision, saying the multi-notch cut weeks before EU leaders are set to decide on new bailout measures that could affect the terms of the Greek aid was “incomprehensible.” Moody’s didn’t pay enough attention to the progress Greece has made in cutting the deficit by 6 percentage points of gross domestic product last year, the ministry said in an e-mailed statement. 

With Greek bonds now well into junk status, it's clear that the combination bailout/austerity plan has failed completely.  Another bailout will be needed, the only question is when and how much.  And as long as Germany refuses to play ball (Andrea Merkel's party has already paid a brutally high price at the German polls) on another bailout, we have our standoff situation.

Who will blink first, Greece or Germany?  My money's actually on Germany, because if they don't bail out Greece, the euro and the Eurozone economy goes with it.  They don't have too much of a choice.  Either way, Germany's government is unraveling.

And the Greek Fire continues to burn.