Defaulting Sovereigns Risk Second Restructuring, Moody’s Says

Nations that undergo distressed debt exchanges risk defaulting a second time, Moody’s Investors Service said in a report that may presage challenges facing Greece.

Of 30 sovereign distressed exchanges since 1997, more than a third were followed by another default event, according to Moody’s. Losses to investors ranged from 5 percent to 95 percent with a mean of 47 percent, New York-based Moody’s said.

“When the initial debt exchanges were small in relation total debt, they were followed by further exchanges of private or official debt, even when the haircuts in the initial exchange were large,” said Elena Duggar, group credit officer at Moody’s in London. That’s “why ratings often remain low, in the Caa to C rating range, following distressed exchanges,” she said.

Greece, the country at the nexus of Europe’s debt crisis, this week met with international lenders to release the next batch of bailout funds after implementing the largest debt exchange in history, according to Moody’s. While politicians including Norbert Barthle, Germany’s parliamentary budget spokesman, have said Greece may need further writedowns, the idea isn’t currently under discussion.

Moody’s rates Greece C, its lowest grade.

Debt Exchange

Greece’s debt exchange in March affected $273 billion of borrowings, according to Moody’s. By April, about 194 billion euros, or 73 percent, of Greece’s residual 266 billion euros of debt was held by the European Central Bank, euro-area governments and the International Monetary Fund, according to the Greek Debt Management Office in Athens.

The rate of sovereign re-default after a distressed exchange is similar to the rate among corporate borrowers, according to Moody’s.

The majority, 67 percent, of sovereign defaults since 1997 started as missed payments, and another 29 percent began as distressed exchanges, involving the offer of a new package of lower value than the original, according to Moody’s.

Maturity extensions were more common in sovereign defaults than were principal haircuts, according to Moody’s. Greece adopted both tactics in its restructuring. The largest nominal writedowns were 66 percent in the Argentinean debt exchange in February 2005, 65 percent in Ecuador’s buyback in May 2009, and Greece’s 53.5 percent.

“It was rare that defaults were resolved quickly and in one round,” Duggar wrote.

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net

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