Prospects Daily: Fitch cuts Greece’s credit rating by two notches to near default status

Important developments today:

1. Fitch cuts Greece’s credit rating by two notches to near default status.

2. Business activity in Eurozone slips back into contraction.

Fitch cuts Greece’s credit rating by two notches to near default status. Rating agency Fitch Ratings downgraded Greece’s long-term sovereign credit rating by two levels to ‘C’ from ‘CCC,’ and indicated that “default is highly likely in the near term.” The agency also said it will follow up with further downgrade to “Restricted Default” once a bond exchange with private creditors takes place. Fitch added that the current process of downgrades is mostly procedural, and it will re-rate Greece’s rating at a level compatible with the agency’s evaluation of its post-default structure and credit profile.

Business activity in Eurozone slips back into contraction. The preliminary estimate of the Eurozone’s Purchasing Managers’ Index (PMI) suggest that business activity in the zone slipped back into contractionary territory in February after expanding slightly in January. However, the weakened level of business activity in the Euro Area, as registered by the 49.7 point PMI reading in February (January was 50.4), though below the historical average, is well above the depressed levels seen in the fourth quarter of 2011 where the PMI readings dipped to around 47 points.  As has characterized much of the performance in recent months, German output continued its resilient and moderate expansion, while output in France was more steady. Excluding the two largest Euro Area economies, the lack of domestic demand in austerity hit highly-indebted Euro Area countries dragged down output in the rest of the Euro Area. Further, with the sub-index on new business orders continuing to decline, the weak state of economic activity in the Euro Area is likely to persist through the first quarter.

Among Emerging Markets

In East Asia and the Pacific, China’s unofficial HSBC Markit purchasing managers' index (PMI) remained under the 50 mark at 49.7 in February (up from 48.8 in January) indicating continuing contraction in manufacturing activity. A separate PMI from the National Bureau of Statistics, which has a different sample and methodology, showed an expansion in January. Thailand’s real GDP plummeted 9.0% year-on-year (y/y) in the last quarter of 2011 following severe floods, trimming full-year growth for 2011 to just 0.1%. Malaysia’s consumer price inflation eased to 2.7% (y/y) in January from 3.0% in December on elevated food inflation and as the economy faced headwinds from continuing global uncertainties. 

In South Asia, India’s consumer price inflation came to 7.6% (y/y) in January according to a new index encompassing both urban and rural households, suggesting continued easing of price pressures arising from slowing economic growth and falling food price inflation. 

In Sub-Saharan Africa, South Africa’s inflation increased to 6.3% (y/y) in January 2012 from 6.1% in December boosted by fast-rising food prices as producers faced grain shortfalls due to erratic rains.