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Announcement:

Moody's Assesses Effect of a Potential Greek Default

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 published today.

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.

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: London +44-20-7772-5456, New York +1-212-553-0376, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

London
Alastair Wilson
Chief Credit Officer (EMEA)
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

New York
Bart Oosterveld
MD - Sovereign Risk
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653


Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Assesses Effect of a Potential Greek Default
No Related Data.

 

© 2014 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


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