The slope just got slippier. Here’s the rating summary released by Moody’s on Wednesday evening (emphasis ours):
Moody’s Investors Service has today downgraded Greece’s local and foreign currency bond ratings to Caa1 from B1, and assigned a negative outlook to the ratings. The rating action concludes the review for possible downgrade that the rating agency initiated on 9 May 2011.
The main triggers for today’s downgrade are as follows:
1. The increased risk that Greece will fail to stabilise its debt position, without a debt restructuring, in light of (1) the ever-increasing scale of the implementation challenges facing the government, (2) the country’s highly uncertain growth prospects and (3) a track record of underperformance against budget consolidation targets.
2. The increased likelihood that Greece’s supporters (the IMF, ECB and the EU Commission, together known as the “Troika”) will, at some point in the future, require the participation of private creditors in a debt restructuring as a precondition for funding support.
Taken together, these risks imply at least an even chance of default over the rating horizon. Moody’s points out that, over five-year investment horizons, around 50% of Caa1-rated sovereigns, non-financial corporate and financial institutions have consistently met their debt service requirements on a timely basis, while around 50% have defaulted.
Greece’s Caa1 rating incorporates Moody’s assumption that current negotiations between the Greek government and the Troika will result in further official support for the Greek government and the announcement of additional austerity and structural reform measures.
The negative outlook on the Caa1 rating reflects Moody’s view that the country’s very large debt burden, the significant implementation risks in its structural reform package, and the country’s ongoing need for external support skew risks of future rating actions to the downside.
A quick look at this handy ratings reckoner (H/T Stacy-Marie Ishmael) unsurprisingly shows that a Caa1 rating carries “substantial risks”.
The move into C rating territory suggests that further downgrades will come thick and fast. FT Alphaville’s Joseph Cotterill reminds us that Moody’s put out a special comment on May 24 explaining why we could see a quick slide down the C ratings. As the table below shows, at this stage the rating becomes a proxy for expected recovery rates, i.e. it reflects outcomes within default not just the default risk.
As the “event horizon” was reached, the rating would very likely migrate further downwards into the Ca or C range. The following table, used as a general guide for securities in default, summarizes the ratings assigned to bonds in default and their corresponding recovery rates.
Our recent study of sovereign defaults shows that post-default recoveries for investors have averaged just over 50%, based on the 30-day post-default price or pre-distressed exchange trading price. There is a wide range around this average, with recoveries ranging from 18% to 95%, and no rated precedent for a developed-world sovereign default in modern times. However, a sizeable discount would be needed to have a meaningful effect on Greece’s debt trajectory, and our expectation is that any restructuring would involve a loss of at least the historical average for private sector lenders.
We give it another 36 minutes before the backlash from Greek officials kicks in.