By Sujata Rao
LONDON, June 21 Crisis-racked Greece has become
the first country to face the threat of relegation to emerging
market status from the elite league in MSCI's equity indices,
although the index provider said on Thursday any such move is
unlikely before 2014.
Analysts reckon moreover that any downgrade would happen
only if Greece exits the euro, a scenario the country's new
coalition government is keen to avoid.
MSCI, which has $7 trillion benchmarked against its indices
globally, said on Wednesday that Greece was no longer in line
with developed markets' size requirements. It also said Greek
authorities had failed to address concerns over certain kinds of
"The Greek equity market has experienced sharp declines,
which are of course associated with the situation in Greece, the
economic situation. The market has shrunk quite significantly,"
Dimitris Melas, MSCI's executive director, told reporters.
MSCI criteria for classification include investor access, as
well as market size and liquidity, and the country's overall
wealth. While the currency is not a criteria, Greek per capita
income of $25,000 is significantly above MSCI's cut-off for
Greece made the jump from emerging markets to developed in
2001. But plunging prices mean Greece currently makes up only a
tiny 0.0193 percent of the MSCI global markets index
. That's down 80 percent from 0.16 percent two
years ago, investors note.
"I don't expect early action on this but clearly they wanted
to have something in place so that if Greece leaves the euro,
they can act quickly," Maarten-Jan Bakkum, investment strategist
for ING's emerging market funds, said.
"It makes sense (to put it under review) but Greece must
first leave the euro zone if it is to become an emerging
He said a Greek exit from the single currency along with
debt and a sharp devaluation of the drachma would lead to a
scenario similar to that experienced by Argentina after 2001
with per capita incomes and GDP plummeting.
This may in turn force the Greek authorities to levy
stringent capital controls to prevent widespread capital flight.
It normally takes MSCI 12 months to complete a review and
another 12 months to implement any reclassification, which means
that would not occur before June 2014, Sebastien Lieblich, head
of index management at MSCI told a conference call.
But if Greece were to introduce capital restrictions "MSCI
may be forced to act more quickly," he said, adding that this
could take just weeks.
MSCI stipulates countries belonging to the developed index
must permit easy movement of capital in and out of the market.
Deutsche Bank head of emerging equity strategy John-Paul
Smith also sees the MSCI move as precautionary, arguing a euro
exit would be the catalyst to trigger a downgrade.
"Politically it will be difficult for any index providers to
reclassify a market as EM if it is in the euro," he said.
He believes Greece would fit well into the emerging markets
category because of the high level of political influence on the
corporate sector and said a move back to emerging markets could
even turn out to be a boon for Greek equities.
"The market may get followed and studied a bit more within
the emerging universe. If Greece were to leave the euro and went
back to having its own currency it could become a very
interesting play," Smith said. "After a big devaluation asset
valuations of companies which survive the turmoil would be very
Greek debt has been in no-man's land for the past two years,
after its bonds were thrown out of flagship global bond indices
following a downgrade of its sovereign credit ratings to "junk".
But it is yet to be included in JP Morgan's emerging debt
indices, used by 80 percent of EM bond investors.
Some say more reclassifications could happen if the euro
crisis deepens and emerging economies continue to strengthen.
"In our view this is an anomaly given many emerging markets'
fundamentals are already better than numerous developed
counterparts," Simon Quijano-Evans, chief emerging markets
economist at ING Bank in London.
"Look out for more such moves in the opposite direction."