Tuesday, July 26, 2011

Moody's: Greece Is Very Near Default (Video) *Lowest credit rating in the world*

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Greece, with sovereign debt now at 150% of GDP, will struggle with high debt for many years.

Moody's: Greece is "Very Near Default" Moody's Investor's Service cut Greece's credit rating by 3 levels to "Ca", which is just one level above default. The "Ca" credit rating is defined by Moody's as "very near default" while the lowest rating "C" is "default". Greece was given a "developing outlook" for the interim. "The support package incorporates the participation of private sector holders of Greek debt, who are now virtually certain to incur credit losses," Moody's said. Further, "If and when the debt exchanges occur, Moody's would define this as a default by the Greek government on its public debt." Greece now has the lowest rating of any country in the world covered by Moody's. Moody's, like Fitch previously, will offer a new rating after the debt restructuring is completed.

Distressed Exchange and Losses The EU is going to refinance Greek debt of €109 billion via the EFSF (European Financial Stability Facility) by rewriting and extending the due dates at lower than market interest rates. If current debt holders, e.g. banks, do not agree, they take a 20% loss. Moody's noted, “The announced (European Union) program along with the Institute of International Finance’s (IIF) statement (representing major financial institutions) implies that the probability of a distressed exchange, and hence a default, on Greek government bonds is virtually 100%.” “The combination of the announced EU program and the debt exchange proposals by major financial institutions imply that private creditors will experience substantial losses on their holding of Greek government bonds and this is something we need to reflect in the rating,” said Moody’s senior analyst Sarah Carlson.

Problematic Precedent Moody’s said, “despite statements to the contrary, the support package sets a precedent for future restructurings should the finances of another euro area sovereign become as problematic as those of Greece.” For Greece’s fellow bailout recipients Ireland and Portugal, the decision by European leaders to lower interest rates and extend the maturities of loans under the European Financial Stability Facility, offset the negative precedent, Moody’s said. “Call it a self-fulfilling prophecy or a vicious circle, but the rating agencies comments suggest that the likelihood is that over the medium term contagion has been increased by the events of last week rather than decreased,” said Gary Jenkins, head of fixed-income research at Evolution Securities in London.

Greek Bailout: Will It Work? Discussing whether the bailout program for Greece is too generous to banks, with Charles Dallara, Institute of International Finance.

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