Moody's Investors Service on Tuesday downgraded Greece's government bond ratings to A2 from A1, with the rating action concluding the review for possible downgrade initiated by Moody's on 29 October 2009. The outlook is negative.This rating action does no
Moody's
Investors Service on Tuesday downgraded Greece's government bond
ratings to A2 from A1, with the rating action concluding the review
for possible downgrade initiated by Moody's on 29 October 2009. The
outlook is negative.This rating action does not affect the ratings of
Greece's country ceilings for bonds and bank deposits, which remain
Aaa (like the rest of the Eurozone). The rating action
downgrading the Greek economy by just one category, the Athens Stock
Exchange (ASE) and bond market responded positively, with the ASE
basic share price index posting a 2.55 percent rise at the opening of
the trading session, standing at 2,172.55 points at 10:55 a.m., and
turnover at 31.9 million euros. The bond market, in turn, opened with
a decline in the spread bvetween the Greek and German 10-year bonds
from 275 base points to 258 base points at the opening on Tuesday
morning, considering the Moody's report on the Greek economy as
mild.
"Greece's repositioned rating of
A2 balances the Greek government's very limited short-term liquidity
risks on the one hand, and its medium- to long-term solvency risks on
the other," says Sarah Carlson, Moody's lead sovereign analyst
for Greece. Moody's notes that the country's longer-term risks have
only partly been offset by the government's announced policy
response.
Moody's had initiated its review
of Greece's A1 sovereign rating in response to mounting evidence that
the government's long-term credit strength was eroding materially. In
particular, the rating agency intended to assess the new government's
policy intentions and its room for manoeuvre.
"Moody's believes that Greece is extremely unlikely to face
short-term liquidity/refinancing problems unless the European Central
Bank decides to take the unusual step of making the sovereign debt of
a member state ineligible as collateral for bank repurchase
operations -- a risk that we consider very remote," says Arnaud
Mar?s, Senior Vice President in Moody's Sovereign Risk Group.
Moreover, as evidenced by other support operations within the EU,
Moody's indicated that there are potentially other means to mobilize
emergency liquidity funding should it be required -- but Moody's does
not believe that this will be necessary.
Moody's also does not believe that the Greek government's
difficulties represent a vital test for the future of the eurozone,
but rather a repricing of relative risks that had been concealed by
years of abundant global liquidity and somewhat above-potential
growth.
"The Greek government's credit
challenges are of a longer-term nature," explains Ms. Carlson.
"They stem from a slow erosion in competitiveness and economic
potential, which implies that the government's debt problem cannot be
resolved by growth alone. They also result from chronically weak
fiscal institutions, which cast a shadow over the government's
ability to implement decisive fiscal retrenchment in order to restore
debt sustainability."
Furthermore,
the combination of a global post-crisis environment that is less
favourable to Greek public finance dynamics (with increased risk
discrimination and muted global demand) and an equally challenging
domestic environment (with accelerating demographic pressure on
public finances in coming years) will make any fiscal adjustment
increasingly difficult and costly to postpone. However, Moody's
continues to think that a migration of liabilities from the banks'
balance sheets to that of the sovereign is unlikely.
Moody's acknowledges that last week's announcements by the Greek
government clearly identify these weaknesses and pave the way for a
lasting solution. However, the long-term credit standing of Greece
will depend on the Greek population's acceptance of these measures
and the government's vigorous implementation of them. "As
neither of these can be taken for granted, and because these measures
will also take time to bear fruit, Moody's has placed a negative
outlook on the Greek government's new A2 rating," says Ms.
Carlson.
At A2, Greece's bond rating
compares with those of other high-income but highly indebted
countries that do not face external payment vulnerabilities. However,
the rating is positioned well below those of Belgium, Ireland or
Italy (which are rated at Aa1-Aa2) to reflect Greece's poor track
record in terms of real fiscal adjustment. Greece's rating also
remains higher than Baa-rated Mexico, Brazil or Hungary, all of which
have better or similar debt metrics but much lower income levels.
These countries also do not benefit from the protection against
external payment crises afforded by Greece's membership in the
European Monetary Union.
Looking ahead, the
question of whether the negative outlook will evolve into a stable
outlook or into a further downgrade will depend on the Greek
government's plan being followed through -- as demonstrated for
instance by a sustained increase in tax revenues and/or the
effectiveness in reining-in expenditure.
