Greece Debt Rating Cut Impacts Global Currencies

Posted December 08, 2009

The repercussions of Greece’s debt rating downgrade by Fitch Ratings has reverberated around the world. Combined with the Dubai loan default news, global economic recovery is looking weak. The Japanese yen and US dollar strengthened as s result. The UK pound weakened against the US on concerns Dubai will have to sell UK holdings.

 

The impact of the recession continues to be felt as Greece recently was hit with the bad news its debt rating on bonds was being cut by Fitch Ratings to BBB+. This makes Greece the lowest rated country in the Euro-Zone and renewed global concerns the recovery is still too weak to be considered reliable. The news could get worse too if two other major ratings companies decide to follow suit.

Greece is faced with a debt level that could reach 125 percent of its GDP next year. The government has a growing budget deficit that must be brought under control. The European Union is exasperated with the lack of serious effort on the part of Greece to control its debt or to take action to reduce the budget deficit.

Greece faces another problem as a result of its rating cut. It will not be able to use its bonds as collateral for European Central Bank loans which can only exacerbate the problem. Moody’s Investors Service had cut its outlook from A1 to negative last 29-October-2009.

Moody’s Investor Services also lowered the ratings on six Dubai-linked debt issuers.

Dubai, Greece…which country next? That is the question facing investors.  With so much uncertainty surfacing in the global financial markets, the yen and dollar strengthened while the euro fell to a one month low against the US dollar.

Investors already facing year end decisions are skittish once again due to Dubai’s debt problems and the Greece credit downgrading. Risk aversion returned to the markets. The euro weakened to $1.4697 against the US dollar. The euro was at 129.89 yen per euro.

The yen rose to 88.35 yen per US dollar. The dollar index rose to 76.197.

The UK pound weakened against the US dollar to $1.6235. The UK and the USA have cause for worry concerning a downgrading of the AAA rating both countries enjoy.  Moody’s has indicated that the two countries now have resilient AAA ratings which is lower than the resistant AAA rating previously assigned.

The pound responded to concerns over Dubai. Dubai is heavily invested in UK commercial property and there is concern much of it will have to be sold as a result of Dubai’s debt problems.

The UK pound fell to $1.6261 against the US dollar. It also weakened against the Japanese yen to 143.70 yen and to 90.61 pence per euro. This was the fifth day of decline for the pound against the greenback.

Oil prices have fallen to $72.62 per barrel for future January delivery. In yet another sign the US economy has far to go in its economic recovery process, the outlook for future oil demand was lowered. The oil markets had hoped economic recovery would spur demand and lower inventories, but it does not appear that will happen anytime soon. The current price is almost $10 a barrel under its year high of $82.

 

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