Greek Woes Grow With New Downgrade; Ireland Expected to Follow

Tuesday was a day of discouraging news for Greece, which, along with Portugal, was hit by a Standard & Poor’s downgrade.

AdvisorOne previously reported on Portugal’s latest cut, but S&P added Greece to the mix as well with the loss of two more notches. Ireland was expected to follow because of the reason S&P cited: the action last week of European leaders considering the European Union’s (EU) bailout mechanism.

Reuters reported that S&P analyst Frank Gill cited as the reason for the downgrade the decision of European leaders last week to replace the European Financial Stability Facility (EFSF) with the European Stability Mechanism (ESM) in 2013. He was reported saying to journalists, "Our view is that this really is a game changer. We do think it is clearly negative for holders of commercial debt, that is our view, that it will weigh on countries' capacity to serve their commercial debt."

Now Athens has to deal with a junk territory rating of BB-, lower than that of either Turkey or Egypt. Greece’s two-year bonds now carry an interest rate of 15.46%, a gain of 10 basis points, and the nation’s bonds continued to underperform on Wednesday as markets considered the news.

The Greek finance ministry issued a statement that said, in part, "[The downgrade] does not reflect the effort and success of the Greek economic policy program or Greece's economic prospects."

Ireland is next in the crosshairs, but according to Alessandro Giansanti, an ING strategist, S&P took no action on Ireland on Tuesday "because they [S&P] are waiting for the results of the stress tests." Results of stress tests on Ireland’s banks are expected on Thursday, and trading of bancassurer Irish Life & Permanent’s shares was halted on Wednesday when there were reports that stress test results might put it under state control.

Irish Life had been the only domestic lender in the country so far to avoid having to be bailed out by the state, but it is expected that the stress tests will find large losses stemming from the residential mortgage market.