Greece Rating Cut to Second-Lowest Level by Moody’s on ‘Orderly Default’
Greece’s credit rating was cut three steps by Moody’s Investors Service, which said the European Union’s rescue for the debt-laden nation will cause substantial losses for investors and amount to a default.
Greece’s long-term foreign currency debt was downgraded to Ca, its second-lowest rating, from Caa1, the company said in a statement in London today. Moody’s said it will reassess the risk profile of any outstanding or new securities issued by Greece after the debt exchange that’s part of the new rescue plan has been completed.
“The combination of the announced EU program and the debt exchange proposals by major financial institutions imply that private creditors will experience substantial losses on their holding of Greek government bonds and this is something we need to reflect in the rating,” Moody’s senior analyst Sarah Carlson said in an interview.
EU leaders on July 21 reached an agreement on a second rescue package for Greece worth 159 billion euros ($223 billion) and strengthened the region’s bailout mechanism to offer protection to other euro-region nations in a bid to stamp out contagion from the debt crisis. The plan for Greece includes 50 billion euros in contributions from private investors through bond exchanges and buybacks to cut Europe’s biggest debt, a move the rating companies said constitutes a technical default.
The extra yield investors demand to hold Greek 10-year debt instead of German bunds widened 9 basis points to 11.97 percentage points after four days of declines. The yield on the country’s two-year bond gained 8 basis points to 27.70 percent.
“We do not think Moody’s decision to downgrade Greek government debt ratings by three notches will affect market volatility substantially,” Fabio Fois, an economist at Barclays Capital in London, said in a note. “We think markets will remain focused more on other issues, such as the effective capability” of the EU’s bailout fund “to limit contagion and also on long-term sustainability of Greek debt.”
Under the EU’s second rescue program for Greece in 15 months, banks will voluntarily write down the value of their bonds by 21 percent as part of the exchanges, the Institute of International Finance, which represents banks and insurers, said July 22. BNP Paribas (BNP) SA and Societe Generale (GLE) SA, France’s largest banks by market value, are among financial firms supporting the plan, the IIF said.
Investors to Suffer
The program implies that private investors will suffer in the debt exchange, “hence a default on Greek government bonds is virtually 100 percent,” Moody’s said.
The Moody’s decision puts its rating closer to that of the other main credit companies. Standard & Poor’s cut Greece to CCC, currently its lowest rating for any country, on June 13. Fitch Ratings also has Greece at CCC. Fitch on July 22 said it would lower Greece to restricted default when the debt exchange goes ahead, before raising the rating back once the swap is completed and the new bonds issued. Standard & Poor’s has also indicated it will cut Greece to default once the exchange goes forward. Moody’s doesn’t have a default rating.
The new support program agreed to by European leaders aims to stop contagion by helping Greece eventually reduce its debt, Alastair Wilson, Moody’s managing director for EMEA credit policy, said in an interview. While the program avoids a “disorderly default,” it “sets a precedent by requiring private sector participation,” he added.
For Ireland and Portugal, which are already in a support program under the EU’s rescue fund known as the European Financial Stability Facility, last week’s package is “broadly credit neutral” as the agreement to lower interest rates on loans balance the risk of bondholder losses, Wilson said.
For other euro-region countries with large debt burdens, “the balance is going to be slightly negative, and therefore that’s something we need to factor in to our rating assessments in the coming month,” he added. The new rescue package was passed after investors began shunning Spanish and Italian debt this month, pushing the yields on their 10-year bond to euro-era records.
The European Commission forecasts that Greece’s debt will reach 158 percent of gross domestic product this year without the exchange. The plan also includes 20 billion euros to strengthen the country’s banks.
Greek Finance Minister Evangelos Venizelos said the banking system is “one of the most guaranteed” in Europe following the new bailout agreement. Venizelos is in Washington today for meetings with International Monetary Fund Managing Director Christine Lagarde, U.S. Treasury Secretary Timothy Geithner and Charles Dallara, managing director of the IIF.
Paying down the debt has been complicated by a three-year recession deepened by the austerity measures enacted as part of Greece’s initial 110 billion-euro bailout in May of last year. Greece’s economy is forecast to shrink 3.8 percent this year after, after a 4.4 percent contraction in 2010, according to data released by the European Commission on July 4.
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