Downgraded: Greece Ousted from Index of ‘Developed’ Countries

Source: WSJ
The latest setback for Greece: MSCI Inc. MSCI -0.92% booted the euro-zone member from its index of developed countries.
The decision, announced late Tuesday, is the first time the index provider demoted a country from its “developed” to its “emerging-market” category since the launch of its flagship emerging-markets index in 1987.
It affirms what investors have believed for years. Multiple bailouts by the European Union and the International Monetary Fund, a sharp contraction in gross domestic product and a still-large debt burden mean Greece now has more in common with Hungary than France.
MSCI, which estimates that almost $7 trillion of investments track its indexes, said Greece failed to qualify as a developed market based on several criteria, including the ease with which money managers can trade shares on the country’s stock market. About $1.4 trillion tracks the MSCI Emerging Markets Index.
While there is some debate as to how certain countries should be labeled, MSCI emphasizes size and accessibility of stock markets. Developed markets tend to have large stock markets and rules that encourage foreign investment, while the opposite is often true for emerging markets.

“Greece is not qualifying in terms of the size of the market,” Remy Briand, managing director and global head of MSCI index research, said in a conference call.
When it officially joins the MSCI Emerging Markets Index in November, Greece will have a 0.3% weighting, Mr. Briand said.
Greece’s stock market staged a rally last year and at the start of this year, but shares have sold off in recent weeks as investors have moved away from riskier assets globally. The FTSE Greece index has slipped almost 5% in the past month, according to FactSet.
The government continues to struggle with debt payments. It also is under pressure to raise money through asset sales, which are off to a weak start. On Monday, Greece didn’t receive any bids in the auction of its natural-gas monopoly, darkening the country’s financial outlook.
Greece has been an emerging market before. MSCI had Greece categorized as an emerging market until May 2001, when it was reclassified as a developed market shortly after adopting the euro.
Other countries saw promotions on Tuesday. Qatar and United Arab Emirates were moved to emerging-market status from the frontier category.
Tuesday’s moves by MSCI are “a reminder of the continued shift of economic power from the West to the East,” Thomas Costerg, an economist at Standard Chartered Bank, wrote in an email.
South Korea and Taiwan, however, will maintain their status as emerging markets, MSCI said. The firm has kept South Korea under review for a potential upgrade to developed-market status since June 2008, while Taiwan has been under review since June 2009.
MSCI classified Morocco as a frontier market, a step down from emerging market. MSCI said it may begin consultations with investors over whether Egypt should be excluded from its emerging-markets index because of foreign-exchange shortages in the country.