China issued a stern warning about Europe's deepening debt crisis yesterday after Greece was given the lowest credit rating of any country ranked by Standard & Poor's, the global credit rating agency.
The Greek situation "could continue to weigh on Europe's economic crisis", the Chinese central bank said in its annual financial stability report. "There is a possibility that the sovereign debt crisis will spread and deteriorate."
That assessment came as Greece's economic woes worsen and debate over a second bailout for the country reaches an impasse. Finance ministers held emergency meetings yesterday in Brussels to discuss Greece. They are expected to finalise a plan for the country at an EU leaders' summit next week.
S&P downgraded Greece to "CCC" late on Monday, dropping the country into a deeper ratings hole after a downgrade to "B" last month. A "CCC" rating means a country is vulnerable to default and needs help to meet financial obligations, according to the agency's website.
Although the agency does not rate all countries, its grim rank for Greece is its lowest for any it does. Moody's Investors Service and Fitch Ratings - the world's other two ratings giants - have also downgraded Greece to "junk" status in recent months.
"The downgrade reflects our view that there is a significantly higher likelihood of one or more defaults," S&P said.
Tim Fox, the chief economist at Emirates NBD in Dubai, said a Greek default would have already happened had it not been a member of the EU, which along with the IMF lined up a Ä110 billion (Dh584.06bn) bailout last year. Other commentators have said in recent days a default by Greece at this point is inevitable, and the question is when, not if, it will happen.
Greece has Ä95bn of government debt coming due by the end of 2013 and another Ä58bn that matures the following year.
"It would have been like Argentina [after it defaulted on debt] a decade ago, but the structure of the euro zone means that can't happen in a straightforward way, and that's holding things back," Mr Fox said.
Politicians and finance ministers across Europe are scrambling to put together a second bailout for Greece. But a rift has emerged between Germany, which wants private banks and investors to take some of the pain by extending maturities on Greek debt, and the European Central Bank (ECB), which advocates further government assistance.
Germany, Europe's largest economy, is concerned about the huge cost of more aid for Greece. Ratings agencies, however, have said they would view the extension of maturities that Germany favours as an effective debt default.
The ECB, meanwhile, wants to avert default at all costs, fearing a financial earthquake in Greece could send tremors through other troubled countries, including Portugal and Spain.
"The idea of involving the private sector in the management of crises has had a destabilising effect," Christian Noyer, the governor of the Bank of France and an ECB governing council member, said in a letter to Nicolas Sarkozy, the French president.
The impact of the S&P downgrade was muted on global stock, bond, commodity and currency markets. The euro strengthened against the dollar, and the Stoxx Europe 600 Index, a popular measure of continental equities, rose slightly. Oil prices also rose. Markets have been swayed in recent days both by the Greek crisis and new Chinese inflation and manufacturing data.
Inflation in China rose to an annualised rate of 5.5 per cent last month, and industrial production figures beat analysts' estimates.
The effect on Greek debt prices, however, was pronounced. Yields on the country's 10-year bonds reached a record high 17.12 per cent yesterday, Bloomberg News reported. Yields go up as bond prices go down, reflecting doubt among investors about the ability of the borrower to repay the debt.
The cost of insuring Greek debt against default - already the most expensive in the world - also rose.
Greece's finance ministry fired back against S&P after the downgrade, saying it "neglects the determined efforts of the Greek government to avoid at any costs any possible violation of Greece's contractual obligations, and the strong desire of the Greek people to plan for their future within the euro zone".
Greece's financial woes do not pose any immediate risks for economies in the Gulf, Mr Fox said. But depending on how the situation evolves, he said they could spill over into the wider economy if international banks pulled back on lending as the crisis worsened.
"Initially it's in Europe, but the ramifications of that will impact banks globally," he said. "These banks are not in isolation trading in these countries. They're everywhere."