By Sujata Rao
LONDON, March 4 (Reuters) - Russell Indexes, which has $3.9 trillion tracking its market indices, will become the first major index provider to relegate Greek equities from the top-tier developed markets category to emerging markets.
The company said on Monday it planned to re-classify Greece at its upcoming annual index review in March and the move would become effective at the end of June.
Greece, with a plunging economy and shrinking stock market, has already been ejected from major global bond indices and two other equity index providers MSCI and FTSE are holding it on review for downgrade to emerging market.
The cut to Greece's developed market status could trigger an exodus by index funds that track developed markets.
Russell said the decision follows a three-year market risk review process which revealed Greece did not meet "macro- and operational risk criteria" for developed market status.
"While reclassifications are rare, they do occur if a country no longer meets the criteria for its current classification." the company said in a statement.
"Russell's methodology requires developed markets, in general, to be the least risky and most efficient in which to trade, with emerging and frontier markets progressively more risky and less efficient along the spectrum. "
The Athens General index currently has a market capitalisation of 32 billion euros, around a third of Ireland's benchmark and down 75 percent from 2008 levels
But George Zois, who heads the Greece and Cyprus desk at London broker Exotix said reclassification would be good news for Athens.
"It's a good step, for the simple reason that Greek stocks have been formally sitting in the developed market space but in fact the market perceives Greece to be more of an emerging market," Zois said. "For funds that have an emerging markets mandate, there will be more flow going into Greek equities."
But the real crunch for Greek stocks will come if MSCI, with $7 trillion benchmarked to its indices, downgrades Greece to emerging markets, a category that has far less cash invested.
FTSE, with $3 trillion benchmarked, last September kept Greece on a watch list for possible downgrade to 'advanced emerging' - the index provider's higher class of emerging market.
So far, however, Greek per capita incomes are higher than the cut-off for MSCI's emerging market index, which has led many analysts to reckon a downgrade to emerging category will only happen if Greece exits the euro.
That has so far been averted, with the help of an international aid package and debt restructuring.