S&P downgrades Greece rating; Ireland, Spain maybe next

Credit-default swaps tied to Greek debt jumped 18 basis points to 250 after S&P lowered its long-term grade one step to A-, according to CMA Datavision prices At 2:45 p.m. in London. Contracts on governments throughout Europe rose.

"The ongoing global financial and economic crisis has, in our opinion, exacerbated an underlying loss of competitiveness in the Greek economy,” S&P analyst Marko Mrsnik said in a statement today.

The euro-region's economy is faltering after the European Central Bank failed to lower interest rates as fast as the U.S. and U.K. The shadow ECB council, a group of economists that monitors the Frankfurt-based central bank, said yesterday it expects Europe's economy to shrink 1.8 percent this year. That compares with a contraction of 1 percent in the U.S., according to a survey by Bloomberg News.

Credit-default swaps on Greece have soared 168 basis points since September, while Ireland climbed more than seven-fold to 217, Spain rose about 72 basis points to 123.5 and Portugal increased 81 to 121. Contracts linked to the debt of lower-rated Mexico and Vietnam fell in the same period.

"The peripheral countries are coming under pressure,” said Ian Stannard, a currency strategist at BNP Paribas SA in London. “Given the huge supply of bonds that's due, this is going to make things more tricky. It's going to leave the euro extremely vulnerable.”

Borrowing Costs

The 16-nation common currency was trading at $1.3118 today, down from last year's high of $1.6038 on July 15. The ECB meets tomorrow to decide borrowing costs and will likely cut its target rate to 2 percent from 2.5 percent, according to the median estimate of 60 economists surveyed by Bloomberg.

Merrill Lynch & Co.'s European Union Government Bond Index is down 0.58 percent this year after rising 9.83 percent last year. The firm's index of German bonds gained 12.2 percent, while one tracking Spanish debt increased 8.78 percent. The index tracking U.S. Treasuries surged 14 percent.

Greece was put on watch for a possible cut by S&P on Jan. 9 as sliding support for the government hampers the country's ability to ride out the economic crisis. The same day, the ratings firm lowered the outlook for Ireland's debt to “negative” from “stable.”

Portugal yesterday became the third euro nation in a week to be threatened with a debt downgrade when S&P's said the country's long-term rating may be lowered from AA-. Spain faces “significant challenges” and may have its top AAA rating lowered, the ratings firm said Jan. 12.

Difficult Challenges

"In our opinion, Portugal faces increasingly difficult challenges as it tries to boost competitiveness and persistently low growth against the backdrop of a heavy debt burden and very high imbalances,” S&P said in a statement. Government attempts at reform “have proven insufficient,” it said.

Portugal's government forecast that it will record a budget deficit of 3 percent of gross domestic product in 2009, the edge of the European Union's limit under the Stability and Growth Pact. The economy will contract this year for the first time since 2003 as its main export markets weaken and Portuguese consumers rein in spending, the central bank forecast Jan. 6.

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