Moody's cuts Greece rating, global economic growth to continue

Moody's finally acknowledges what the market already knows. From Bloomberg:

Greece’s credit rating was cut to non-investment grade, or junk, by Moody’s Investors Service, threatening to further undermine demand for the debt-strapped nation’s assets as it struggles to rein in its budget deficit.

In making the four-step downgrade to Ba1 from A3, Moody’s cited “substantial” risks to economic growth from the austerity measures tied to a 110 billion-euro ($134.5 billion) aid package from the European Union and the International Monetary Fund. The lower rating “incorporates a greater, albeit, low risk of default,” Moody’s said in a statement yesterday in London. The outlook is stable, it said.

Europe did provide some positive economic news on Monday. Again from Bloomberg:

European industrial production increased more than economists forecast in April, led by demand for intermediate goods such as steel and car engines.

Output in the economy of the 16 nations using the euro rose 0.8 percent from March, the European Union’s statistics office in Luxembourg said today. Economists had projected a gain of 0.5 percent, the median of 33 estimates in a Bloomberg survey showed. From a year earlier, April production jumped 9.5 percent, the biggest gain since the data started in 1991.

Meanwhile, Morgan Stanley economists think that the European sovereign debt crisis is unlikely to lead to a double-dip recession for the global economy.

Notwithstanding the sovereign debt crisis that is rattling Europe and unnerving global financial markets, global economic growth has continued to surprise on the upside over the past few months... As a consequence, our forecast for full-year 2010 global GDP growth has moved up from 4.4% last quarter to 4.8% now, and we wouldn't be surprised if it turned out to be 5% or higher eventually...

There are plenty of things to worry about: a sovereign crisis that in our view will eat its way through the European periphery into the core and eventually move across the Atlantic; lower potential growth due to tougher regulation, higher taxes and weak banking systems; and potential global inflation surprises in EM countries due to excessively loose global monetary policies. However, the double-dip recession and the resulting deflationary pressures that many worry about right now are merely tail risks, in our view.

Indeed, last week, the OECD had reported that its composite leading indicators for April point to continuing albeit slowing expansion in most OECD countries.

Slower growth might not be a bad thing though for countries facing high inflation. India's inflation rate hit 10 percent in May and another rate hike from the Reserve Bank of India now looks likely soon.