Moody’s Could Still Cut Greece To “Junk”

The $1 trillon EU bailout package has not fooled the keen analysts at Moody’s–the same organization that helped bring the world the mortgage-securities catastrophe. The ratings agency clearly thinks that the entire program will be inadequate to stabilize problems in both Greece and Portugal. Ireland may be downgraded as well.

The cut in Greece would take its debt to “junk”

From the Moody’s note written by analsyt Pierre Cailleteau:

Ireland (Aa1, negative outlook): No significant rating action is expected in the short run. The negative outlook reflects the risk of a further, gradual deterioration in terms of both debt affordability – i.e. the share of government revenues used for interest payments – and finance ability – i.e. the cost at which Ireland could raise further debt. The rating is supported by the fact that both Ireland’s economic strength and its institutional strength compare very favourably to some of the countries in the southern periphery of EMU.

» Portugal (Aa2, on review for possible downgrade): We expect to conclude the review in the coming four weeks or so. A downgrade to Aa3 is probable; but an adjustment to A1 cannot be ruled out. It will depend on the tug of war between sharper fiscal adjustment on one side, and the higher cost of funding and continued anaemic growth prospects on the other.

» Greece (A3, on review for possible downgrade): We expect to conclude our review in the coming four weeks. The migration will most likely be substantial, probably within the Baa range; but an adjustment to below investment grade is also possible. This will depend on developments in the Greek economy once the fog of financial panic, support-mobilisation and street demonstrations dissipates. The country’s debt is large but not unbearable; however, the required adjustment is obviously very painful, and short-term economic prospects are clearly dismal – though not out of proportion with developments already seen in several European economies last year. Once we have concluded our review, we will publish a detailed explanation of our rationale for re-positioning the rating.

The Greek ratings cut would make a joke of the entire EU financial stability plan.  It seems that the legal attacks against Moody’s have made the ratings agency absurdly cautious.

Douglas A. McIntyre