June 18, 2010 Reading Time: < 1 minute

The Greek crisis rolls on.  This week yields on Greek government bonds rose by almost 3/4 of a percentage point to 9.06 percent as Moody’s–a rating agency–downgraded its debt to junk bond status citing “substantial” risks in connection with the three-year Greek  program for economic reform.

Furthermore, being downgraded to junk bond status also means that greek government securities will be taken off several indices that investors use to track government bonds. As reported by the Financial Times:

“Greece will be removed from Citigroup’s World Government Bond Index, the EMU Government Bond Index and the World Broad Investment-Grade Index. Greek bonds will also no longer be eligible for Barclays Capital’s Global Aggregate, Global Treasury, Euro Aggregate and Euro Treasury Indexes.”

This in turn means that many investors will have to sell off greek government bonds as fund managers have a mandate to track these indices.

Moody’s downgrading follows in the trail of a similar downgrading by Standard & Poor’s. Of the three main rating agencies, only Fitch still rates greek sovereign debt as investment grade. However, if Fitch should follow, many institutional investors could be forced to sell off greek government bonds as they can only hold “investment grade” securities.

Curiously, the Chinese government pledges to invest more in Greece, thinking that this small European economy will overcome its difficulties. As Greece is sliding back into emerging market status, after having enjoyed the status of a eurozone developed country for 9 years, Chinese official seem interested in expanding their economic ties: “Our government will encourage strong Chinese companies to come to Greece and find investment partners.”

Marius Gustavson

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