Moody's Investors Service has today downgraded Greece's local- and foreign-currency bond ratings to C from Ca and has not assigned an outlook to the ratings. Today's rating decision was prompted by the recently announced debt exchange proposals for Greece, which imply expected losses to investors in excess of 70%, which is consistent with Moody's criteria for a C rating.
RATINGS RATIONALE
The announced debt exchange proposal implies that private creditors that participate will incur substantial economic losses on their holdings of Greek government debt. Moody's estimates that the percentage difference between the value of the coupon and principal promised by existing Greek government bonds and the value of the package investors will receive in the exchange exceeds 70%, which is consistent with a C rating. After the Eurogroup's assessment of Greece's adherence to bailout conditions has been finalised, debt exchanges have been completed and a new Memorandum of Understanding between the EU and the Greek government has been finalized and published, Moody's will re-assess the credit risk profile and ratings of any outstanding or new securities issued by the Greek government.
According to Moody's, the announced proposal for private-sector involvement, which is a precondition for the provision of further financial assistance from the euro area, would constitute a distressed exchange, and hence a default, on Greek government bonds. Moody's defines a distressed exchange as an exchange which results in losses to investors relative to the initial promise and an outright default is likely in the absence of the exchange.. Both these conditions are met in this case, given that private-sector involvement had been one precondition for Greece to obtain additional official financing and thus avoiding an outright payment default. The magnitude of investor losses will be determined by the difference between the face value and accrued interest of the debt exchanged and the market value of the cash or securities received. The exchange offer is subject to financing conditions and minimum participation rates; however, if the debt exchange is not undertaken as planned, investors are likely to experiences losses of similar magnitude nonetheless. Moody's expects further clarity on the execution of the exchange in early March.
Looking ahead, the EU programme and proposed debt exchanges will reduce Greece's debt burden, but the risk of a default even after the debt exchange has been completed remains high. Moody's believes that Greece will still face medium-term solvency challenges: its stock of debt will still be well in excess of 100% of GDP for many years; the country is unlikely to be able to access the private market once the second assistance package runs out; and its planned fiscal and economic reforms will still face very significant implementation risks. Moody's will consider these issues in the post-exchange re-assessment of Greece's credit risk profile.
Moody's decision not to assign an outlook to the rating is based on the very high likelihood of a default by the Greek government on its bonds and the fact that C is the lowest rating on Moody's rating scale.
WHAT COULD MOVE THE RATING UP
Moody's currently believes that if there are any upward movements in Greece's sovereign rating in the weeks after the debt exchange, they are likely to be small. For Greece's bond rating to rise above levels associated with very high probability of future default, the pace of fiscal consolidation and/or structural reform implementation would need to proceed much faster than is currently expected. A further precondition for a substantial upgrade also would be that the key drivers of the debt dynamics -- such as economic growth, interest rates, privatisation revenue, and the ability to generate and sustain large primary surpluses—were seen to be evolving in a way that would significantly accelerate the pace of debt reduction.
The principal methodology used in this rating was Sovereign Bond Ratings published in September 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
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