Greece hit with debt downgrade, cool Moody’s view of rescue

PARIS, (AFP): Greece was hit hard with a debt downgrade on Monday and a warning from Moody’s rating agency that default status is almost certain, as the eurozone rescue will provide only “limited” relief.

The rescue raised the chances that Greece could stabilise and reduce its debt, and it helped the eurozone by “containing the severe near-term contagion risk that would have followed a disorderly payment default,” Moody’s said.

The agency, downgrading Greek debt by three notches to only one notch above default status, gave a muted assessment of the long-term effects for the eurozone of the complex rescue.

Although the rescue offered a number of benefits for Greece as well as for the eurozone, “the impact on Greece’s debt burden is limited.”And “Greece will still face medium-term solvency challenges: its stock of debt will still be well in excess of 100 percent of gross domestic product for many years.”Moody’s, taking a similar line to the Fitch agency on Friday, said that once old debt had been replaced with new bonds on easier terms under the rescue, it would assess the new instruments and issue a new notation.

Both agencies warned that debt-burdened eurozone countries are still at risk from market turbulence and pressure on their debt.

A default rating could have unforeseeable domino effects, but the ISDA organisation which oversees CDS default insurance contracts said the rescue terms would probably not trigger payout clauses.

Averting a default, and triggering CDS turmoil, was a key obstacle in the rescue talks, but eventually eurozone governments resigned themselves to this possibility.

Moody’s Investors Service said that the second rescue announced on Thursday meant that private sector holders of Greek bonds “are now virtually certain to incur credit losses.”This rescue for Greece involves initially up to 2014 about 110 billion euros from eurozone governments in various forms and 50 billion euros from banks. But Moody’s said the effect on the Greek debt burden would be “limited.”The agency, which issued two statements on the rescue, said that it had “downgraded Greece’s local- and foreign-currency bond ratings three notches to Ca from Caa1 and has assigned a developing outlook to the ratings”, reflecting uncertainty about the market value of the future new bonds.

It explained that “if and when the debt exchanges occur, Moody’s would define this as a default by the Greek government.”On Friday, the French-US rating agency Fitch said that it would issue a restricted default rating for Greece, and would then issue a new and probably higher rating of low investment grade for the new instruments.

Fitch said that the rescue was an important step forward but warned that unless there was general economic recovery in the eurozone and progress on cutting budget deficits, “downward pressure on sovereign ratings will persist.”Moody’s explained that the programme, together with support from big financial institutions in the Institute of International Finance IIF, “implies that the probability of a distressed exchange, and hence a default, on Greek government bonds is virtually 100 percent.”It 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 percent.”The IIF said on Thursday that private sector investors “will contribute 54 billion euros from mid-2011 through mid-2004 and a total of 135 billion euros ($194 billion) to the financing of Greece from mid-2011 to end 2020.”The agency also noted that Ireland and Portugal, which are also being rescued by the European Union and International Monetary Fund, would benefit from reduced loan rates. But, “despite statements to the contrary, the support package sets a precedent for future restructurings.”The effect of the strategy was therefore likely to be neutral on perceptions of risk for people holding Irish and Portuguese debt, it said.

Moody’s also said that for eurozone countries which did not have the best credit ratings and had debt problems, on balance “the negatives will outweigh the positives and weigh on ratings in future.”Fitch had said that for the same reasons, further volatility could not be ruled out “and downward pressure on sovereign ratings will persist.”