Greek Tragedy: Nation Gets First Ever Emerging-Market Demotion

More bad news for Greece this week, as MSCI Inc. (NYSE:MSCI) has made it the first ever country to be downgraded to emerging-market status.

The news comes amidst of a variety of factors, chief of which is Greece’s failure to meet criteria regarding securities borrowing and lending facilities, short selling and transferability, according to MSCI.

Qatar was upgraded to a developed to an emerging-market along with the United Arab Emirates, while South Korean and Taiwan maintained their status in that category.

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The Greek government has been under immense pressure by the International Monetary Fund to sell off state-owned assets as a part of the bailout deals it received.

Greece failed to sell its state-run gas monopoly, Depa SA, which prompted its stock index, the ASE to drop 1.4 percent to 882.99. The Greek government has underwritten $318 billion worth of the bailout funds it was awarded with a promise to sell state assets. The plan has not gone well though, and in the last three years the country has failed to fire one of its 650,000 public employees.

However, that changed yesterday, with the government’s announcement that the state-run media company, the Hellenic Broadcasting Corporation, or ERT, would be closed and restructured.

The move did not require approval from parliament, and the employees mounted a sit-in until the move was backtracked, with the coalition government in Greece also opposing the move. The IMF has been harsh on Greece, though, and scolding the country’s political leadership for refusing to take “politically difficult measures” in order to help with its share of the bailout deal.

Cutting public sector jobs is difficult in Greece though. Antonis Manitakis, a constitutional scholar working for Prime Minister Antonis Samaras says that, “Greece is one of the most bureaucratic countries in Europe. The majority of government hirings in the past were made through clientelism or illegally.”

Increased financial regulations led MSCI to place Greece under review in 2012, noting the stringent policies led to a market which was not fully operational. Moreover,  Coca-Cola HBC AG, one of the most important stocks of the Athens exchange, moved to the London exchange, reaffirming MSCI’s suspicions of Greece’s developed status.

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Qatar and the UAE have been on the upswing, though, and Qatar is looking for $430 million in foreign investment. The news of the upgrade should be lucrative to investors. Montasser Khelifi, a Dubai-based senior manager for global markets at Quantum Investment Bank Ltd., says that such an upgrade is “a recognition that the business conditions and the legislations are good enough and suitable for investors.”

Until Greece sorts out its employment situation, investor confidence in the country will continue to weaken. Already, money is moving out of Greece to more ‘safe havens’ and the MSCI decision could balloon the issue further. The decline in status and investment is not likely to bring any favors to the youth unemployment picture in Greece, where over 60 percent of young people are out of work.

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