Greece entered a league of debt-market pariahs when Moody’s Investors Service downgraded its credit rating to Caa1, leaving only Ecuador as a worse sovereign risk. Ecuador, now Caa2, defaulted in 1999 and again in 2008.
Caa1, four steps above Moody’s lowest rating and 16 from the highest, marked a brief stop for Argentina in 2001 on its way to default and devaluation. In 1998, Pakistan was cut to Caa1 after its nuclear-bomb tests isolated it internationally. Cuba, battered by a U.S. embargo and mounting debt to foreign exporters, has had the same rating since 1999.
Greece risks becoming the euro area’s first sovereign default, causing a chain reaction that could rock the financial system of the world’s second-biggest economic bloc. Last year’s 110 billion-euro ($158 billion) rescue of Greece failed to stem the contagion. With the country facing a funding shortfall of 30 billion euros next year, policy makers are trying to put together the latest financial lifeline by the end of the month.
“The Moody’s downgrade was absolutely right,” said Bill Blain, co-head of strategy at broker Newedge Group in London. “It confirms what we all knew.”
Moody’s said in a statement yesterday that there’s “at least an even chance of default over the rating horizon.”
Greece responded by saying the cut wasn’t warranted as it “overlooks” the nation’s commitment to meeting its 2011 fiscal target as well as an “accelerated” state asset-sales program. Greece has achieved “significant fiscal targets” and will submit to parliament its mid-term fiscal plan in the next few days, the government said in an e-mailed statement.
Series of Downgrades
Struggling to pay its creditors amid a third year of economic contraction, Greece has had its debt rating cut five times by Moody’s since December 2009 when the grade was A1.
Greek sovereign debt has been the world’s most expensive to insure since April, when it surpassed Venezuela. Credit-default swaps on Greece now cost 1,467 basis points, exceeding Venezuela’s by about 300 basis points and leading Pakistan, the next most expensive, by almost 600.
Credit swaps on Portugal and Ireland, which rose to records today, now round out the five most expensive sovereigns after overtaking Argentina in April. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
The Greek five-year swaps imply a 72 percent probability the country will default within that time, according to a standard pricing model used by traders. The calculation assumes investors would recover 40 percent on the underlying bonds if there were a default.
“Over five-year investment horizons, around 50 percent of Caa1-rated sovereigns, non-financial corporate and financial institutions have consistently met their debt-service requirements,” Moody’s said in yesterday’s statement. “Around 50 percent have defaulted.”