Other ratings agencies have issued responses to the austerity measures announced by Greece on Wednesday, but everyone knows Moody’s is the only one that really matters.
The agency is currently the outlier in terms of Hellenic Republic ratings, holding the country at the all-important A-level (A2 to be precise), whereas S&P and Fitch have it at BBB+.
Having a rating above the A- level is important for Greek debt since it means the stuff will still be eligible to use as collateral for the ECB’s normalised liquidity operations.
Here then, is the start of the Moody’s statement:
London, 03 March 2010 — Moody’s Investors Service today said that the additional fiscal measures announced by the Greek government are consistent with Moody’s current A2 rating, with a negative outlook, for Greece’s government bonds. Today Moody’s also published an Issuer Comment, entitled “A Ten-Point Analysis of Greece’s A2 (Neg) Rating”, which reiterates the rating agency’s rationale behind Greece’s rating and the conditions under which that rating could change.
And in the 10-point explanation analysis of its A2 rating, Moody’s has come over all warm and fuzzy on the Mediterranean nation, but rather harsher on markets.
The report, for instance, is subtitled: “Risk over-estimation after a long period of risk under-estimation.” And it starts with this little market-dig:
For several years, financial markets had under-estimated the credit risk of Greece. Consequently, the country’s borrowing rate had fallen to around the same level as that of Aaa-rated Germany – despite the fact that we rated Greece at A1 during that period.
And here are the (crunched) 10 points:
- Greece is a wealthy country with a rather large and sophisticated financial system and is borrowing in its own domestic currency. It is therefore price-constrained rather than quantity-constrained in terms of financing. In other words, the risk of a “buyers’ strike” is very low. . .
- The process of mobilizing EU solidarity will have been fractious, but this is not necessarily a source of additional concern. Indeed, this is probably a positive step for maintaining the credibility of the Eurozone. Large EU governments wanted to extract significant concessions from Greece in terms of fiscal sovereignty before even considering the provision of assistance . . .
- But how can Moody’s be so sure that Greece’s liquidity risk is low when the ECB publicly declares that it will normalize its rules concerning counterparty risk before year-end – thereby making banks’ ability to use Greek government paper as collateral contingent upon Moody’s keeping the rating at a minimum of A3? The answer is that we do not believe that the ECB’s planned course of action is credible. We do not believe that the ECB, after initially lowering the bar to help banks and ensure financial stability, would raise the bar in the middle of a bout of regional financial instability . . .
- All the above points explain why we have downplayed liquidity concerns, relative to what appears to be happening in the CDS markets. Our rating approach has therefore been resolute but progressive.
- In essence, our rating stance is focused on medium-term issues. We believe that Greece can retain its A2 rating only if it brings to a halt the recent deterioration of its debt metrics and then reverses this deterioration in a sustainable way through drastic fiscal adjustment and improved competitiveness.
- Such a turnaround is not the most likely outcome, which is reflected in our negative outlook. After all, previous Greek governments have presented ambitious plans but ultimately failed to deliver radical policy changes, partly due to entrenched political interests. Nevertheless, as illustrated in the chart below, we do not believe that a dramatic turnaround in Greece’s budget dynamics is impossible.
- How will we know whether the Greek government’s strategy is compatible with a A2 rating? We would stress that the issue is not for Greece to suddenly look like a Aaa-rated credit. However, we do expect the country to be able to position its debt metrics more comfortably within the “territorial waters” of an A-rated government.
- Moody’s will be able to determine very quickly – i.e. within a couple of months – if this is not the case.
- A deviation from this announced plan – particularly signs that the deficit reductions will fall short of what has been promised – would lead to downgrades, in proportion with the shortfall.
- A multi-notch downgrade would occur if the plan was derailed rapidly and significantly, ruining the probability of a stabilization of Greece’s debt in the coming years, let alone of a debt consolidation.
Related links:
The European central bank gets Moody – FT Alphaville
S&P avoids the dreaded `M’ word over Greece – FT Alphaville
How do you say vicious circle in Greek? – FT Alphaville