On the flip side, the yield that investors demand to hold 10-year Greek bonds jumped 74 basis points to 9.08 percent. As investors lose more and more confidence in the Greek government’s ability to pay its debts, it will be harder for them to borrow to cover their short-term obligations, worsening the crisis.
Many experts, however, did not believe that Moody’s downgrade was in any way surprising. Gary Jenkins of Evolution Securities in London said to Bloomberg that “Greece being junk shouldn’t be a shock.”
Markets had a similarly strong start yesterday, but all three major indexes moderated their gains as the day wore on and then fell sharply after Moody’s Investors Service downgraded Greece from A3 to Ba1.
Another looming problem for Greece is a common investing policy of pension funds, mutual funds, and other supposedly secure investment vehicles. Many of these are required to hold investment-grade – Baa3, in Moody’s own alphabet soup of jargon – securities, and will now avoid any and all Greek debt, in addition to possibly jettisoning any Greek debt they already hold.
The rating agencies’ tardiness in reassessing their analysis of major debtors like Greece can cause major problems for these funds when they are forced by their own policies to sell under-performing assets at a loss.
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