Breaking…
London, 29 April 2010 — Moody’s Investors Service has today announced that it expects to complete its review of Greece’s A3 sovereign bond rating shortly after the details of the euro area/IMF programme are unveiled. Moody’s has consistently maintained that Greece’s short-term liquidity and restructuring risks are negligible given the depth of international commitment to maintaining regional financial stability. Moody’s believes that the appropriate repositioning of Greece’s rating should therefore be based on the country’s medium-term credit fundamentals.
Moody’s has previously indicated that a multi-notch downgrade is likely, and that the specific magnitude of the downgrade will depend on the level of ambition of the multi-year economic and fiscal programme; the likelihood that Greece adheres to it consistently; and the levels at which debt will stabilise/reverse (as compared to peers). The details of the euro area/IMF package will provide crucial credit information covering: economic and fiscal assumptions; mechanisms of support for the banking system; adjustment measures to be implemented over several years under the programme; and the total amount of financing, which will determine how long the Greek government will be sheltered from hostile market conditions.
Based on the balance between the size and content of the package, Moody’s will assess (1) whether public debt metrics can be stabilised credibly through a fiscal effort that is both decisive and not socially disruptive to the extent of rendering it unachievable, and (2) at what level stabilisation will take place. The very high projected level of public debt in Greece is neither unsustainable nor unbearable. The service of the debt consumes approximately 14% of government revenues, compared with 20%-30% in the 1990s. However, stabilising the debt will require a tightening of the primary balance by approximately 12% of GDP in the coming years, which will require considerable commitment and sacrifice by the Greek government and population.
Should, however, the mobilisation of external support continue to be fractious and/or should the Greek government and people fail to fully deliver on and acquiesce to ambitious policy adjustments, Moody’s indicates that this would inflict significant damage to Greece’s creditworthiness.
Moody’s previous rating action with respect to the government of Greece was implemented on 22 April 2010, when its long-term debt ratings were downgraded to A3 from A2 and placed on review for possible further downgrade. The government’s P-1 short-term rating was also placed on review for possible downgrade…
Remember, Moody’s holds the whip hand over the eligibility of Greek debt as ECB collateral.
The rating agency is clearly abiding by the European Commission’s warning to behave.
For now.