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Announcement:

Moody's publishes updated methodology on country risk ceilings

20 Jan 2015

Several euro area country risk ceilings have been revised upward

New York, January 20, 2015 -- Moody's Investors Service published today a revised methodology on country risk ceilings, following the closure of a Request For Comment initiated in November. The changes to the methodology and the consequent changes to 11 country ceilings reflect Moody's view that the risk of member states exiting the monetary union and re-denominating their currencies, which is the primary determinant of euro area country ceilings, is generally lower than previously assessed.

The revised methodology can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_178623

RATINGS RATIONALE

Moody's country risk ceilings determine the maximum credit rating achievable for a debt issuer or for a structured finance transaction whose cash flows are generated in a particular country. They allow Moody's ratings to capture the risk of operating in a non-Aaa credit environment by taking account of unavoidable political, institutional, financial and economic factors that affect all issuers and transactions predominantly based in each country.

The revised methodology explains that, in Moody's view, the main component of ceiling risk in euro area countries is the risk that the country exits the euro area and re-denominates all local debts into a new, weaker currency. The ceilings applied to different euro area countries will therefore be determined predominantly by that country's risk of exit, and, in turn, currency re-denomination.

The revised methodology has led to an upward adjustment of 11 euro area countries' country risk ceilings (the changes are summarized below). Aaa-country ceilings were unaffected by the new methodology, and no country ceiling was lowered as a result of the revised approach. No government bond ratings were affected by the ceiling changes.

According to Moody's, the experience of the crisis, together with measures taken by the euro area authorities to address contagion, suggest that the risk of countries' exit from the union has generally diminished. A number of initiatives have been put in place to strengthen the union, including the establishment of the European Stability Mechanism, the European Central Bank's long-term refinancing operations and the announcement of its willingness to conduct Outright Monetary Transactions if needed, as well as the fiscal compact and the banking union.

Where, as Moody's would generally expect, exit risk is viewed as very small, country ceilings in the euro area will now be placed six notches above the government's bond rating. Previously, ceilings were typically set three to four notches higher. Only in circumstances where the country's commitment to the currency union is perceived to be materially weaker will its ceiling be closer to its government bond rating.

Accordingly, all euro area country ceilings have been raised to six notches above the relevant government bond rating or -- if the government bond rating is A3 or higher -- to Aaa, with two exceptions: in Greece and in Cyprus.

For Greece, the local and foreign currency bond and deposit ceilings remain unchanged at Ba3, i.e. four notches above the government bond ratings of Caa1 (stable outlook). That outcome reflects Moody's view of the relatively greater probability of the country exiting the currency union, based on the rating agency's assessment of a range of factors including events in 2012 and more recently, as well as prevailing political dynamics.

For Cyprus the local and foreign currency deposit ceilings remain constrained by restrictions on financial transactions in place in Cyprus; however Moody's has raised the deposit ceilings to B3 from Caa1 to reflect recent easing of these restrictions. The local-currency and foreign-currency bond ceilings for Cyprus were raised to Baa3, i.e. six notches above the government bond rating of B3 (stable outlook).

As Moody's country ceilings determine the maximum credit rating achievable for a structured finance transaction whose cash flows are generated from domestic assets or residents, the changes will have positive implications for securitization ratings in non-Aaa euro area countries. Moody's expects that the revised methodology will have no impact on non-structured finance ratings, which are currently not constrained by country ceilings and rarely exceed the sovereign rating by more than a notch.

Moody's revised cross-sector methodology is titled "Local Currency Country Risk Ceiling for Bonds and Other Local Currency Obligations" and is available on www.moodys.com.

Ceiling changes are summarized below. Press releases regarding structured finance credit ratings affected by the revisions to Moody's methodology will follow.

-- Cyprus (B3 stable): local-currency and foreign-currency bond ceilings were raised to Baa3 from B1. Short-term foreign-currency bond ceiling was changed to Prime-3 (P-3) from Not Prime (NP). However, local-currency and foreign-currency bank deposit ceilings were changed to B3 from Caa1, and short-term foreign-currency bank deposit ceiling remains Not Prime (NP).

-- Estonia (A1 stable): Local-currency bond ceiling and local-currency bank deposit ceiling as well as foreign-currency bond ceiling and foreign-currency bank deposit ceiling were raised to Aaa from Aa2. Short-term foreign-currency bond and bank deposit ceilings remain Prime-1 (P-1).

-- Greece (Caa1 stable): local currency bond ceiling and local-currency bank deposit ceiling as well as foreign-currency bond ceiling and foreign-currency bank deposit ceilings remain unchanged at Ba3. Short-term foreign-currency bond and bank deposit ceilings remain Not Prime (NP).

-- Ireland (Baa1 stable): Local-currency bond ceiling and local-currency bank deposit ceiling as well as foreign-currency bond ceiling and foreign-currency bank deposit ceiling were raised to Aa1 from Aa3. Short-term foreign-currency bond and bank deposit ceilings remain Prime-1 (P-1).

-- Italy (Baa2 stable): Local-currency bond ceiling and local-currency bank deposit ceiling as well as foreign-currency bond ceiling and foreign-currency bank deposit ceiling were raised to Aa2 from A2. Short-term foreign-currency bond and bank deposit ceilings remain Prime-1 (P-1).

-- Latvia (Baa1 stable): Local-currency bond ceiling and local-currency bank deposit ceiling as well as foreign-currency bond ceiling and foreign-currency bank deposit ceiling were raised to Aa1 from A1. Short-term foreign-currency bond and bank deposit ceilings remain Prime-1 (P-1).

-- Lithuania (Baa1 positive): Local-currency bond ceiling, local-currency bank deposit ceiling and foreign--bond ceiling were raised to Aa1 from A2 and the foreign-currency bank deposit ceiling was raised to Aa1 from Baa1. Short-term foreign-currency bond ceiling remains at Prime-1 (P-1) and foreign currency bank deposit ceilings was raised to Prime-1 (P-1) from Prime-2(P-2).

-- Malta (A3 stable): Local-currency bond ceiling and local-currency bank deposit ceiling as well as foreign-currency bond ceiling and foreign-currency bank deposit ceiling were raised to Aaa from A1. Short-term foreign-currency bond and bank deposit ceilings remain Prime-1 (P-1).

-- Portugal (Ba1 stable): Local-currency bond ceiling and local-currency bank deposit ceiling as well as foreign-currency bond ceiling and foreign-currency bank deposit ceiling were raised to A1 from A3. Short-term foreign-currency bond and bank deposit ceilings to Prime-1 (P-1) from Prime-2 (P-2).

-- Slovakia (A2 stable): Local-currency bond ceiling and local-currency bank deposit ceiling as well as foreign-currency bond ceiling and foreign-currency bank deposit ceiling were raised to Aaa from Aa2. Short-term foreign-currency bond and bank deposit ceilings remain Prime-1 (P-1).

-- Slovenia (Ba1 stable): Local-currency bond ceiling and local-currency bank deposit ceiling as well as foreign-currency bond ceiling and foreign-currency bank deposit ceiling were raised to A1 from Baa1. Short-term foreign-currency bond and bank deposit ceilings to Prime-1 (P-1) from Prime-2 (P-2).

-- Spain (Baa2 positive): Local-currency bond ceiling and local-currency bank deposit ceiling as well as foreign-currency bond ceiling and foreign-currency bank deposit ceiling were raised to Aa2 from A1. Short-term foreign-currency bond and bank deposit ceilings remain Prime-1 (P-1).

The principal methodology used in these ratings was Local Currency Country Risk Ceiling for Bonds and Other Local Currency Obligations published in March 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see Moody's Ratings Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the time horizon in which a credit rating action may be after a review or outlook action took place.

Please see the ratings tab on the issuer page on www.moodys.com for the last action and the history of the rating. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com/disclosures for further information.

Please see the ratings disclosure page on www.moodys.com/disclosures for disclosures on significant Moody's shareholders and on certain relationships between Moody's, its shareholders and/or rated issuers.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Elena Duggar
Senior Vice President
Credit Policy Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Alastair Wilson
MD-Global Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's publishes updated methodology on country risk ceilings
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