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Global Credit Research - 16 Dec 2010
London, 16 December 2010 -- Moody's Investors Service has today placed Greece's Ba1 local
and foreign currency government bond ratings on review for possible downgrade.
Greece's country ceilings for bonds and bank deposits are unaffected
by the review and remain at Aaa (in line with the Eurozone's rating).
Moody's decision to initiate this review was prompted, despite
significant progress in implementing a very large fiscal consolidation
effort, by the increased uncertainty over (1) Greece's ability
to reduce its debt to sustainable levels given the recent substantial
upward revision in debt levels; (2) the substantial revenue shortfall
that we have observed in 2010; and (3) the level and conditions of
ongoing support that would be available to Greece in the event that its
market access remains cut off. Therefore, Moody's review
will focus on the factors, namely nominal growth and fiscal consolidation,
that will drive the country's debt dynamics over the next few years.
It will also consider implementation risk, which appears to be particularly
high in 2011 for both political and administrative reasons.
Moody's says that a multi-notch downgrade would be possible
if it concludes that there is an increased risk that Greece's debt-to-GDP
ratio will fail to stabilize in the next three to five years, or
that there is a greater risk that EU support will turn out to be less
strong after 2013 than the rating agency had previously assumed.
RATIONALE FOR REVIEW
"Greece has made significant progress in implementing a very large
fiscal consolidation effort. However, the challenge of reducing
debt to sustainable levels has also become greater due to both domestic
and regional developments," says Sarah Carlson, Vice
President-Senior Analyst at Moody's Investors Service and
lead sovereign analyst for Greece.
These developments include:
1.) Substantial upward revision in debt levels: Greek debt
was already at a high level before Eurostat's recent revision of
Greece's 2009 debt statistics to 126.8% of GDP.
This 11.7 percentage point revision is almost twice the level that
Moody's had anticipated and amplifies the risks stemming from the
country's uncertain growth and interest rate outlook over the coming
2.) Weak revenue growth: Greece has fallen well short of
its revenue growth targets in 2009, a factor that contributed to
the upward revision in its deficit projections for 2010. Although
there are signs that VAT collections are improving in spite of the weak
macroeconomic climate, the vigorous implementation of reforms to
fight tax evasion will be critical to a sustainable improvement in public
3.) Uncertainty surrounding ongoing support: The level and
conditions of ongoing support on offer to Greece is no longer certain.
The IMF and European authorities have expressed very strong support for
Greece, as long as Greece follows through with its economic programme.
However, the authorities' willingness and ability to provide
Greece with additional assistance is not assured and particularly depends
on programme implementation. Moreover, the precise nature
and conditions of support that will be forthcoming after 2013 --
and the implications that this will have for bondholders -- is unclear.
Moody's recognises the impressive progress that the government has
made in implementing the fiscal consolidation programme so far.
The reduction of the fiscal deficit by around 6 percentage points and
the passage of landmark pension and labour-market reform are noteworthy
"However, the substantial upward revision of debt levels,
weak revenue growth and lack of certainty surrounding long-term
support, if required, are negative factors that outweigh the
many positive developments that Moody's has observed in Greece since
it accepted the Eurozone/IMF assistance package in May 2010,"
says Ms. Carlson.
FACTORS TO BE CONSIDERED IN THE REVIEW
Firstly, Moody's rating review will focus on Greece's
ability to reduce debt to sustainable levels in a challenging economic
and political environment. This will be affected by two variables:
nominal growth and fiscal consolidation. Therefore, a key
element of this review is Greece's 2012-2014 plan for fiscal
consolidation and economic reform. The Eurozone/IMF programme that
was adopted in May 2010 encourages the implementation of a credible,
feasible and incentive-compatible set of structural reforms.
However, the programme has relatively few details about the policy
agenda for 2012-2014. The revision of debt statistics has
raised the bar for what these future reforms need to accomplish.
"In order for Greece to achieve large primary surpluses over a sustained
period of time, further structural fiscal adjustments will be required,"
says Ms. Carlson.
Moreover, the Greek government's ability to speed up the implementation
of the fiscal and structural reform programme will also be a factor in
Moody's review. "The government is clearly very determined
to push the adjustment process forward, but it is facing significant
political and administrative headwinds," says Ms. Carlson.
Implementation risk is particularly high in 2011, and during the
review Moody's will be looking at how those risks are being addressed.
The external environment in which Greece has been operating has clearly
deteriorated, which has had an adverse impact on its creditworthiness.
Although support from the Eurozone has been very strong up until now,
Moody's believes that changing market conditions imply that there
are realistic limitations to any such support. Moreover,
the nature of this support after the European Financial Stability Facility
(EFSF, rated Aaa) winds down in June 2013 is unclear. "Uncertainty
surrounding plans for burden-sharing with investors in the event
of a crisis are likely to negatively affect market access and funding
costs for Greece," says Ms. Carlson.
PREVIOUS RATING ACTIONS AND METHODOLOGIES
Moody's last rating action affecting Greece was implemented on 14
June 2010, when the rating agency downgraded Greece's government
bond ratings to Ba1 and assigned a stable outlook. Prior to that,
Moody's last rating action on Greece was taken on 22 April 2010,
when the rating agency downgraded Greece's government bond ratings
to A3 and placed the rating on review for further possible downgrade.
The principal methodology used in rating the Government of Greece is "Moody's
Sovereign Bond Methodology" published in September 2008, which
can be found at www.moodys.com. Other methodologies
and factors that may have been considered in the process of rating this
issuer can also be found on Moody's website.
MD - Sovereign Risk
Sovereign Risk Group
Moody's Investors Service
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
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Moody's Investors Service Ltd.
Moody's places Greece's Ba1 rating on review for possible downgrade
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