Moody’s Dowgrades Greece–Finally

Moody’s took time moved its rating of Greece to the lowest possible level. This happened even after the International Swaps and Derivatives Association said that the swap of old Greek bonds for new ones worth much less by private investors did not trigger a “credit event” and cause the payment of CDS.

The reason for the Moody’s downgrade actually was the “haircut” of 70% that these private investors took–although the loss was widely expected days ago.

Moody’s wrote:

 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.