In Dec09, Fitch (shortly followed by S&P) downgraded Greece's credit rating to BBB+ with negative outlook (the first time in 10 years the country has received a sub-A rating, though still investment grade). Moody's was left with the only A1 rating on Greece's debt. This is a great case study in how the market reacts to a ratings downgrade. Actions: Athens shares fell 6% in response. CMA reported Greece 5yr CDS rose to 226.8 BPS from 209 BPS on Tuesday's NY close (a rise of 17.8bps). 10 yr Greek government bonds fell, yields rose to 5.4%. This also caused the Greek-German 10yr bond yield spread to widen by 4bps to 225bps. Also the Greek finance minister issued mutliple reassurances: "Papaconstantinou (PhD LSE, worked previously at OECD) says Greek banking system not at risk". (STOCKS, BONDS, CREDIT, BOND SPREADS).
Why the concern? What drove the downgrade? The reason is Greece's high levels of debt (forecasted to be 125% of GDP next year). A downgrade is bad for a country - it may make it difficult for the country to raise money in bond markets and through central bank liquidity operations (e.g. through ECB, exchanging sovereign bonds for ECB loans).
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