LONDON (Reuters) - Greece has been placed on review for relegation to emerging market status by index provider MSCI, which would make it the first country to be thrown back out of developed equity indices.
Analysts, however, reckon any such relegation would only happen if Greece were to exit the euro zone.
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 transactions.
"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 emerging markets.
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 .MIWD00000PUS.
"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 market."
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.
A Greek coalition government is taking office committed to keeping Greece in the single currency.
Deutsche Bank head of emerging equity strategy John-Paul Smith said a move back to emerging markets could turn out to be a boon for Greek equities.
He said the level of political influence on the corporate sector would make Greece a good fit in the emerging markets category.
"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 cheap."
But he too sees the MSCI move as a precautionary one, 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.
Some say more reclassifications could happen if the euro crisis deepens and emerging economies continue to strengthen. But the normal process of shifting a country from one MSCI index to another can take years.
South Korea, for example, has been under consideration for an upgrade to developed market status for four years with no change to date.
"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."
Reporting by Sujata Rao; Editing by Jeremy Gaunt