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Announcement:

Moody's: EU Support Package Permits Orderly Default by Greece and Buys Time; Mixed Credit Impact for Other Euro Area Sovereigns

Global Credit Research - 25 Jul 2011

London, 25 July 2011 -- The support package for Greece announced after last Thursday's summit benefits all euro area sovereigns by containing the contagion risk that would likely have followed a disorderly payment default on existing Greek debt, says Moody's Investors Service in a new Special Comment published today. However, the credit implications of the announcement for creditors of individual countries depend on the balance of the positive market-stabilising elements of the plan and the negative precedent set by the endorsement of distressed exchanges between Greek creditors and the sovereign.

GREECE

The support package incorporates the participation of private sector holders of Greek debt, who are now virtually certain to incur credit losses. If and when the debt exchanges occur, Moody's would define this as a default by the Greek government on its public debt.

Accordingly, Moody's has today downgraded Greece's debt ratings from Caa1 to Ca to reflect the expected loss implied by the proposed debt exchanges. Once the distressed exchange has been completed, Moody's will reassess Greece's rating to ensure that it reflects the risk associated with the country's new credit profile, including the potential for further debt restructurings. While the rating agency believes that the overall package carries a number of benefits for Greece -- a slightly reduced debt trajectory, lower debt-servicing costs, as well as reduced reliance on financial markets for years to come -- the impact on Greece's debt burden is limited.

OTHER EURO AREA SOVEREIGNS

The support package for Greece benefits all euro area sovereigns by containing the severe near-term contagion risk that would likely have followed a disorderly payment default or large haircut on existing Greek debt. The EFSF will also be given additional powers to extend support to euro area sovereigns and stabilise sovereign bond prices.

Ireland and Portugal, which currently receive support from the European Financial Stability Mechanism (EFSF), will pay lower interest rates on their borrowings going forward. Set against that, however, despite statements to the contrary, the support package sets a precedent for future restructurings should the finances of another euro area sovereign become as problematic as those of Greece. The impact of Thursday's announcement for creditors of Ireland and Portugal is therefore likely to be credit-neutral.

As for creditors of other non-Aaa sovereigns with high debt burdens or large budget deficits, the positive elements of the announcement -- including the positive short-term impact on market sentiment, the introduction of tools to help stabilise sovereign debt prices and avoid the disruptive effect of disorderly defaults and, should funding from the EFSF ever be required, the lower interest rate which would be charged -- need to be weighed 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 and weigh on ratings in future.

The new report titled "EU Support Package Permits Orderly Default by Greece and Buys Time, But Credit Effects Are Mixed for Other Euro Area Sovereigns" can be found at 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
Managing Director
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Yves Lemay
MD - Banking
Sovereign Risk Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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SUBSCRIBERS: 44 20 7772 5454

Moody's: EU Support Package Permits Orderly Default by Greece and Buys Time; Mixed Credit Impact for Other Euro Area Sovereigns
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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