– Greece default ‘virtually 100 percent’ (Washington Post, July 25, 2011):
Moody’s Investors Service again downgraded Greece’s credit standing Monday, setting the stage for a likely declaration that the country is in default as a newly approved rescue plan moves forward.
In the first review by a ratings agency of the plan approved by European leaders last week, Moody’s cast doubt on the long-term impact on the conditions under which heavily indebted euro zone countries will be able to borrow money.
The ratings service said the plan does improve Greece’s financial prospects for the next few years and probably will stop the problems in that country from undermining confidence in weaker nations such as Ireland and Portugal — diminishing the risk that Europe’s financial troubles will spiral into a broader crisis.
But the fact that Greece is likely to default on one or more of its outstanding bonds sets a “negative precedent” that will diminish faith in other nations. Now that the 17-nation euro zone has shown it is open to a default, Moody’s said, it is more likely that other nations might try to follow suit.
European officials have tried to anticipate that possibility, and declared last week that the new program for Greece — a combination of $150 billion in new loans and expected concessions from private bondholders — won’t be repeated for other countries.
The many positive aspects of the plan, Moody’s said, needed to be judged against “the negative implications of this precedent-setting package should any country face financing challenges similar in severity to Greece’s. On balance, Moody’s says that, for creditors of such countries, the negatives will outweigh the positives.”
Details of last week’s agreement are still to be worked out. The International Monetary Fund must review and approve an expected increase in its lending to Greece. Greek finance minister Evangelos Venizelos is in Washington on Monday for meetings at the IMF and the U.S. Treasury to continue talks about the new package.
The opinion by Moody’s gives the most concrete glimpse so far of how the three major bond rating agencies, key players in the unfolding Greek and euro zone crisis, will interpret last week’s action by European leaders.
The good news: The default by Greece won’t be “disorderly,” but will proceed on a step-by-step basis as banks and other private investors sign up for a bond exchange program negotiated on the behalf of major financial institutions by the Institute of International Finance.
The private-sector contribution will lower Greece’s need for cash in coming years by an estimated $70 billion, which the IIF said amounts to about a 20 percent cut in the value of the bonds that will be exchanged. As big investors make those exchanges, Moody’s said the likelihood of a default declaration “is virtually 100 percent” on those particular bond issues.
The good news, however, is that the agency said it would then reevaluate all of Greece’s other outstanding bonds, and any new ones, on the basis of a financial situation that would have been strengthened.
The E.U. program and proposed debt exchanges “will increase the likelihood that Greece will be able to stabilize and eventually reduce its overall debt burden,” Moody’s said. “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.”