Greece, Hit With Moody’s Downgrade, No Impact On Rescue

Moody’s made a very sharp downgrade of Greece’s sovereign debt. The nation will still get its rescue package. Its neighbors and the IMF cannot afford to back away.

“The combination of the announced EU support programme and debt exchange proposals by major financial institutions implies that private creditors will incur substantial economic losses on their holdings of government debt. The rating’s developing outlook reflects the current uncertainty about the exact market value of the securities creditors will receive in the exchange,” Moody’s wrote as it cut Greek debt from Caa1 to Ca.

Investors in the banks that will be affected by the restructuring of Greek debt did not sell off shares in a panic. Analysts have already said the value of Greek bank holdings will drop about 20%. That is a good deal better than what might have happened in an unstructured default without the more than $200 billion bailout package. The assistance does not change the fact that the Greek economy is still in grave trouble, and the issue may not be solved at all. But it is not all at near-term.

The value of debt post-default have been taken out of the hands of credit rating agencies, whether that debt is for obligations of Greece, Portugal, Ireland, or even the U.S. Practical considerations are more important than opinions. The private sector will have to participate in the salvation of Greece. The same thing will probably be true for other weak EU economies. It is far better that the damage to bank balance sheets is known early. That gives them the chance to raise what money they have to in an orderly fashion.

The restructures of sovereign debt have gone from something that is to be feared to something that is expected. There is no longer a mad rush for the exits. Whatever trouble might arise three or four years from now can be addressed then, maybe. The Greek sovereign debt market is placid in the meantime.

Douglas A. McIntyre