Greece has been reclassified from a developed market to an emerging one by Russell Investments. Russell cited the “unfortunate economic tailspin” of the Greek economy as the reason for the move.
Russell Investments advise various funds and has $2.4 trillion (£1.6 trillion) in assets, the firm said in a statement that the Greek economy had become a concern for the whole world since 2009.
Greece failed the parameters set by Russell investments, such as operational and macro risk tests – including per capita income, total market capitalisation and the level of trading volume – which decides the economic health and status of a country. It is noteworthy that Russell classified Greece as a developed market in 2001 but has now reclassified the struggling nation as an emerging market.
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.
Greece will trim its public sector by 150,000 from 2013-2015 to cut its wage bills, primarily through attrition, which implies hiring one new person for every 10 person retiring.
Russell investments answered the probable question, which would have been echoed as to why Portugal or Spain has not been reclassified, even though they are troubled economies. Russell Investment said there is no doubt that both countries are undergoing problems, and they are not immune from the possible change in market risk status, but the intensity of decline is not as severe as the one witnessed in Greece.
Greece is the first country Russell has cut to an emerging market from a developed market status.
The global methodology index of Russell is a three year path towards a country’s probable reclassification based on the category in which the country falls: developed, emerging or frontier market categorisation.
The statement said: “Russell’s methodology requires developed markets to be, in general, the least risky and most efficient in which to trade.”
The table below shows EIU Country Risk Scores from 2010–2012 for GIIPS countries as well as median countries in the Russell Developed Index and median countries in the Russell Emerging Markets Index.
The score of Greece is higher, which caused it to fail the macro risk portion of Russell’s assessment in 2012 and again in 2013.
In terms of market capitalization, Greece was the lowest and has gone through the most significant loss in market cap size for the past three years (from 2010-2012).