…Fitch slashed its rating on Greece by another three notches and further into junk status. The move from B+ to CCC leaves Greece just one grade above a default rating.
– Greek Credit Rating Lowered Three Levels by Moody’s on Debt-Exchange Plan (Bloomberg, July 25, 2011):
Greece’s credit rating was cut three steps by Moody’s Investors Service, which said the European Union’s rescue for the debt-laden nation will cause “substantial” losses for investors, amounting to a default.
Greece’s long-term foreign currency debt was downgraded to Ca, their second lowest rating, from Caa1, the company said in a statement in London today. Moody’s said it will re-assess the risk profile of any outstanding or new securities issued by the Greek government after the debt exchange that’s part of the rescue plan has been completed.
“The combination of the announced EU program and the debt exchange proposals by major financial institutions imply that private creditors will experience substantial losses on their holding of Greek government bonds and this is something we need to reflect in the rating,” Moody’s senior analyst Sarah Carlson said in an interview.
The financing package will consist of 109 billion euros ($157 billion) from the euro region nations and the International Monetary Fund. Financial institutions will contribute 50 billion euros through a series of bond exchanges and buybacks to cut Europe’s biggest-debt load.
The extra yield investors demand to hold Greek 10-year debt instead of German bunds snapped four days of narrowing and widened 9 basis points to 11.97 percent. Shorter-term Greek debt gained today, with the yield on the country’s two-year bond declining 23 basis points to 27.4 percent.
Under the EU’s second rescue program for Greece in 15 months, banks will voluntarily write down the value of their bonds by 21 percent as part of the exchanges, the Institute of International Finance, which represents banks and insurers, said July 22. BNP Paribas and Societe Generale, France’s largest banks by market value, are among financial firms supporting the EU’s second rescue of Greece, the IIF said.
The program implies that private investors will suffer in the debt exchange, “hence a default, on Greek government bonds is virtually 100 percent,” Moody’s said.
The Moody’s decision puts its rating closer to that of the other main credit companies. Standard & Poor’s cut Greece to CCC, currently its lowest rating for any country, on June 13. Fitch Ratings also has Greece at CCC. Fitch on July 22 said it would lower Greece to restricted default when the debt exchange goes ahead, before raising the rating back once the swap is completed and the new bonds issued. Standard & Poor’s has also indicated it will cut Greece to default once the exchange goes forward. Moody’s doesn’t have a default rating.
The new support program agreed to by European leaders aims to stop contagion to the rest of the euro area and help Greece stabilize and eventually reduce its debt, Moody’s said in its report. The European Commission forecasts that Greece’s debt will reach 158 percent of GDP this year without the exchange. The plan also includes 20 billion euros to strengthen the county’s banks.
Greek Finance Minister Evangelos Venizelos said the banking system is “one of the most guaranteed” in Europe following the new bailout agreement. Venizelos is in Washington today for meetings with IMF Managing Director Christine Lagarde, U.S. Treasury Secretary Timothy Geithner and Charles Dallara, managing director of the IIF.
Paying down the debt has been complicated by a three-year recession deepened by the austerity measures enacted as part of Greece’s initial 110 billion-euro bailout in May of last year. Greece’s economy is forecast to shrink 3.8 percent this year after, after a 4.4 percent contraction in 2010, according to data released by the European Commission on July 4.