Moody’s Investors Service said it placed Greece’s Ba1 bond ratings on review for a possible downgrade, citing heightened concerns about whether the country will be able to reduce its debt to “sustainable levels”.
“Greece has made significant progress in implementing a very large fiscal consolidation effort,” Sarah Carlson, vice president-senior analyst in Moody’s sovereign-risk group, said today in an e-mailed statement from London. “The challenge of reducing debt to sustainable levels has also become greater due to both domestic and regional developments.”
Moody’s, which followed Standard & Poor’s warning two weeks ago of a possible downgrade, cited a “substantial” shortfall in 2010 revenue and concerns the conditions of aid to Greece may change after the European Union raised the country’s debt forecasts last month. Greece secured a 110 billion-euro ($142 billion) aid package from the EU and the International Monetary Fund in May to avert a default.
Greece’s debt as a percentage of GDP stood at 127 percent of gross domestic product in 2009, the highest in the 27-nation EU. The EU says he measure will rise to 156 percent in 2012. Greece has said debt as a percentage of GDP will peak in 2013.
Eurostat revised Greece’s 2009 debt and deficit figures on Nov. 15, surpassing Italy as the region’s most indebted country. Debt was boosted by 5.5 billion euros from off-market swaps Greece initially used to lower the debt and deficit and another 18.2 billion euros of debt, worth 7.8 percent of GDP, came from public companies added to national accounts, Eurostat said.
‘More Difficult’ Challenge
Greece’s debt challenge is “materially more difficult” since the revision, Carlson said in a phone interview. While revenue collection has improved, the government is short of targets overall, she said.
Credit-default swaps on Greek sovereign debt rose 28.5 basis points to 949, the highest since Nov. 30, according to data provider CMA.
The yield premium investors demand to hold Greek 10-year bonds over similar-maturity German bunds was at 880 basis points today, down from a high of 973.1 in May. Yields on 10-year Greek bonds remain the highest in the euro region, at 11.7 percent. That compares with 8.08 percent for Ireland, 6.24 percent for Portugal, 5.47 percent for Spain and 4.59 percent for Italy.
Moody’s said a “multi-notch” downgrade was possible if it concluded that the debt-to-GDP ratio had failed to stabilize in the next three to five years.
Moody’s cut Greece’s credit rating four steps to non- investment grade, or junk, on June 14, warning of the rising economic cost of the debt-strapped country’s budget cuts. On Dec. 2, Greece was warned it could receive a lower credit rating from Standard & Poor’s as proposed EU rules threaten to hurt bondholders. S&P placed Greece’s “BB+” long-term sovereign rating on “CreditWatch” with negative implications.
Greece has cut spending, raised taxes and trimmed wages to tackle the deficit, which swelled to 15.4 percent of GDP last year. To secure the EU-IMF aid, the government pledged to trim the shortfall to under the EU’s 3 percent limit in 2014. The crisis has prompted investors to sell the bonds of Greece and other high-deficit nations and pushed the euro.