Moody’s Investors Service on Monday downgraded Greece’s local- and foreign-currency bond ratings to Ca from Caa1 and has assigned a developing outlook to the ratings.
According to Moody’s, 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. After the debt exchanges have been completed, Moody’s said it will re-assess the credit risk profile of any outstanding or new securities issued by the Greek government.
The announced EU programme along with the Institute of International Finance’s (IIF’s) statement (representing major financial institutions) implies that the probability of a distressed exchange, and hence a default, on Greek government bonds is virtually 100%.
Moody’s said the magnitude of investor losses will be determined by the difference between the face value of the debt exchanged and the market value of the debt received. The IIF has indicated that investor losses are likely to be in excess of 20%.
Neverthless, Moody’s said the EU programme and proposed debt exchanges will increase the likelihood that Greece will be able to stabilize and eventually reduce its overall debt burden. The support package for Greece also benefits all euro area sovereigns by containing the severe near-term contagion risk that would likely have followed a disorderly payment default or large haircut on existing Greek debt.
However, 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 and it will still face very significant implementation risks to fiscal and economic reform.
Moody’s previous rating action on Greece was implemented on 1 June 2011, when the rating agency downgraded Greece’s government bond ratings by three notches to Caa1 from B1. Prior to that, Moody’s last rating action on Greece was taken on 9 May 2011, when the rating agency placed Greece’s government bond ratings on review for possible downgrade.