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Global Credit Research - 24 May 2011
London, 24 May 2011 -- Moody's Investors Service has explored possible Greek default scenarios
in order to assess the impact on the country's sovereign rating,
the consequences for Greek banks and the possible paths of credit contagion
to other European sovereigns, which are discussed in a Special Comment
Moody's did not comment on the likelihood or the desirability of
a debt restructuring, but focused more narrowly on some of the credit
implications of different default scenarios. It is apparent that
the longer the current state of uncertainty affecting Greece persists,
the greater the temptation on the part of both the Greek and the euro
area authorities to try to undertake some form of debt restructuring --
in other words, to allow Greece to default. A Greek default
might take many forms, including changes in terms and conditions,
selective "re-profiling" and large-scale "voluntary"
debt buybacks at high discounts, which Moody's classifies
as distressed exchanges.
Moody's believes that a default is likely to have adverse credit
rating implications for Greece, possibly some other stressed European
sovereigns, and the Greek banks, regardless of the efforts
made to achieve an "orderly" outcome. The full impact
on Europe's capital markets would be hard to predict and harder
still to control. The fallout would have implications for the creditworthiness
(and hence the ratings) of issuers across Europe.
The impact on the Greek government's creditworthiness itself would
depend on the extent to which a default would -- by lowering the
face value of outstanding debt -- improve the affordability of the
country's debt obligations. A default would most likely cause
Greece's rating to migrate down to Ca or C and remain in the Ca
and Caa territory for a sustained period following a default, barring
the unlikely event that the resulting debt reduction is so great that
the risk of a second default becomes quite low.
The Greek banking sector would require recapitalizing to offset banks'
losses on Greek government bonds, and continued liquidity support
from the European Central Bank, at least for as long as the sovereign's
own access to the capital markets remained impaired. Should that
support be forthcoming, then the Greek banks' ratings could
stay in the B range. A more likely scenario is that a sovereign
default is accompanied by some form of default on bank debt, in
which case banks would also experience multi-notch downgrades,
quite possibly to as low as Greece's own rating.
As for other stressed European sovereigns, Moody's believes
that their ratings will invariably be affected, regardless of the
myriad forms that a default by Greece could take. This would in
turn lead to increasingly polarised sovereign ratings in Europe,
with stronger countries retaining high or very high ratings, and
weaker countries struggling to remain in investment grade.
Since the bailout program for Greece was first announced in May 2010,
the country's default risk has continued to rise due to (1) weaker-than-expected
economic growth, (2) underperformance against debt consolidation
targets, (3) growing political protests in reaction to planned austerity
measures, (4) declining market confidence and access, (5)
as well as the increasingly mixed messages from Greece's supporters.
These developments contributed to Moody's significant downward adjustments
to Greece's rating in 2010 and to its decision, earlier this
month, to place Greece's B1 debt rating on review (which is
ongoing) for further possible downgrade.
Moody's Special Comment entitled "Assessing the Effect of a Potential
Greek Default" is now available on www.moodys.com.
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Chief Credit Officer (EMEA)
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
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MD - Sovereign Risk
Moody's Investors Service
Moody's Assesses Effect of a Potential Greek Default
Moody's Investors Service Ltd.
One Canada Square
London E14 5FA
JOURNALISTS: 44 20 7772 5456
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