A major fund manager has reclassified Greece from a developed to an emerging market, in an unprecedented move reflecting the “unfortunate economic tailspin” of the Greek economy, which has threatened the future of the euro.
Russell Investments, which advises funds with $2.4 trillion (£1.6 trillion) in assets, said the Greek economy has been a “world concern” since it revealed unsustainable levels of public debt in 2009.
The American-based company said Greece, which Russell designated as a developed market in 2001, has been on a path towards reclassification as an emerging market since 2010, having failed Russell’s operational and macro risk tests, including per-capita income, total market capitalisation and the level of trading volume, which determine the economic health and status of countries.
Managers at Russell will be forced to buy and sell shares to align holdings with their funds’ criteria, following the reclassification.
In a 10-page note on the relegation of Greece, Mat Lystra, Russell’s senior research analyst, said: “Since the country began revealing unsustainable levels of public debt in 2009, it has been in an unfortunate economic tailspin that at times has threatened to pull apart the entire European Monetary Union.”
He added that despite several bailouts and efforts to stem an outright Greek default, “any opportunities in the Greek economy have become inherently riskier exposures for global investors”.
“During our 2013 global market risk reviews, when we again evaluated the two risk profiles, Greece failed both tests,” the note said.
The news comes as officials from the European Union and the International Monetary Fund return to Athens on Sunday to assess Greece’s performance under a bailout plan as the government plays down the prospect of public sector job cuts.
The heads of the “troika” mission from the EU, IMF and the European Central Bank will meet finance minister Yannis Stournaras to review progress on privatisations, tax administration reforms, bank recapitalisation and steps to shrink the public sector.
In its sixth year of recession, Greece has agreed to shrink its public sector by 150,000 by 2015 to cut its wage bill, mainly through attrition: hiring one new person for every 10 who retire.
Russell recognised that relegating Greece to an emerging market would invite questions over why the fund had not also reclassified Portugal or Spain; two more eurozone countries with troubled economies.
“While both of those countries have had their share of problems, and although neither is immune from a potential change in market-risk status, we haven’t seen the same degree of decline as we’ve observed in Greece – nor the same rise in risk,” the statement said.
Greece is the first country Russell has cut to emerging from developed market status.
Russell’s global indexes methodology describes a three-year path towards a country’s potential reclassification – by way of the company’s developed, emerging or frontier market categorisation – as having become either more or less risky for investors.
The statement said: “Russell’s methodology requires developed markets to be, in general, the least risky and most efficient in which to trade.”