The credit rating agency Fitch dropped the rating of Greece. Image from Flickr.
This morning, international credit rating agency Fitch downgraded the credit rating of Greece to BBB-. One of the lowest rating scores available, the opinion of Fitch is that Greece’s economy is quickly failing. The European Union has, in principle, agreed to give Greece emergency cash loans. The reality may be much more complicated, though.
What the Fitch Greece ruling means
When the ruling was made by Fitch, Greece was officially downgraded to a “bad investment.” Traditionally, large countries have been considered very good investments. Greece’s economy was at one point the twenty-seventh largest in the world. In 2004, the statistical arm of the European Commission found that the debt of Greece had been significantly under reported. In the first quarter of 2009, Greece’s budget deficit was 4.34 billion Euros, or 12.9% of the gross domestic product of Greece. When Fitch downgraded the credit rating of Greece, the agency was basically saying the buying any of Greece’s for-sale bonds would be a very dangerous investment. Basically, Fitch believes Greece won’t be able to pay up on its debt.
Why Fitch Greece rating was dropped
In February, Greece’s economy saw inflation jump to 3.9 percent while industrial output has fallen to 9.2 percent. In other words, without borrowing money, Greece’s economy is in very real danger of failing. However, just like loans for people with bad credit, loans for countries with bad credit can be very difficult.
Fitch Greece rating encourages EU action
Last month, in a summit of the European Union, a “financial safety net” was agreed upon by EU members.The European Union has said that they will step in with instant payday loans for Greece. When the EU will step in, and with how much help, though, is still under discussion. Angela Merkel, the German Chancellor, has insisted that Greece be loaned money at the market rate. With a low Fitch Greece rating, though, that may be a rate Greece simply cannot pay off.
The outlook for Greece
While the Fitch Greece downgrading is a very significant move, the likelihood that Greece’s economy will fail is very low. Greece is a member of the Eurozone, an economic zone headed by the European Union. While Greece will definitely have a difficult few years, there will be some solution. Greece is also looking for internal solutions to the Fitch Greece downgrading, including cutting wages and increasing taxes to decrease the deficit. The International Monetary Fund, a lender that usually specializes in third-world countries, is also considering lending a hand to the economy in Greece.
Sources:
Business Week
Guardian
Wikipedia
