Moody's Investors Service has today placed Greece's B1 local
and foreign currency government bond ratings on review for possible downgrade.
Moody's decision to initiate this review was prompted by:
(1) revisions to fiscal metrics, most notably the significant upward
revision of the 2010 general government deficit;
(2) increased uncertainty about the sustainability of Greek sovereign
debt in the context of potential delays in the achievement of fiscal consolidation
(3) concerns about the probability and the implications of a delayed and
weaker economic recovery.
Moody's review will focus on the factors that will drive the country's
debt dynamics over the next few years.
Moody's says that a multi-notch downgrade is possible if
it concludes that there is large risk that Greece's debt metrics
are on an unsustainable path. In Moody's view, such
conditions would materially increase the risk of debt restructuring over
the short to medium term. Under such conditions, euro area
policymakers have stated that future loans from the Exchange Stability
Mechanism would be extended only if private creditors were to bear some
of the losses. If the path of Greek debt-to-GDP were
to appear unsustainable, then Greece might itself have an incentive
to seek a change in the terms of its debt obligations.
Greece's country ceilings for bonds and bank deposits are unaffected
by the review and remain at Aaa (in line with the euro area's rating).
At this point of time, however, due in large part to systemic
risk within Greece, the highest rated domestic issuer or securitization
is rated A3.
RATIONALE FOR REVIEW
The Greek fiscal and economic reform package remains at least as ambitious
as it was when Moody's last reviewed the government's rating.
Moody's continues to believe that the government will face a very
significant challenge in meeting the targets stipulated by this package.
Additionally, Moody's notes a series of recent setbacks that
prompted it to initiate this review of Greece's ratings.
First, Greece's 2010 general government deficit has come in
at 10.5% of GDP, which is significantly higher than
the levels estimated by government and international observers earlier
this year. This increase in the 2010 budget deficit relative to
prior expectations is due to higher-than-expected budget
deficits at the local government level and at government-owned
hospitals, along with generally disappointing tax and social contribution
collections due to the slowing of economic activity.
Second, when combined with ongoing difficulties in tax revenue generation
and collection, this larger 2010 deficit outcome raises further
questions about the government's ability to achieve the deficit
reduction target for 2011.
Third, Moody's is concerned about signs that the potential
need for an additional fiscal austerity programme is likely to deepen
and prolong the recession and may further undermine domestic political
support for the reform programme.
FACTORS TO BE CONSIDERED IN THE REVIEW
In light of the growing challenges that the Greek government's economic
and fiscal adjustment programme faces, current market sentiment
as well as sustained commentaries about the likelihood of a debt restructuring,
Moody's views Greece's return to financial markets in 2012
as increasingly unlikely. Through discussions with both the Greek
government and the Troika, the review will also attempt to ascertain
the relevance of the increasingly public discussion -- based in part
on comments by unnamed public officials with apparent in-depth
knowledge of ongoing discussions -- about different ways for the
Greek government to restructure its government debt (most of which would
be captured by Moody's default definition). A restructuring could
come about either due to a unilateral action on the part of Greece,
or through a framework jointly developed by Greece and the Troika,
perhaps in the context of the provision of additional official support
through the ESM in 2013. The Troika's decision about whether
or not to support or require a restructuring may depend, in part,
on the likely contagion effect of a Greek restructuring on other European
sovereigns, on the capital strength of the ECB, and on Greek
banks as well as non-Greek banks with exposures to Greece.
Moody's ratings review will therefore partly focus on the costs
and benefits of a possible restructuring of Greece's debts,
as a supplement to Moody's debt sustainability analysis.
In addition, Moody's intends to closely review the feasibility
of the government's privatization plan, since it plays a key
role in the government's fiscal strategy for 2011-2015.
In Moody's view, a successful execution of the government's
privatisation plan is essential if the government is to achieve a sustainable
debt position. Moreover, while the money raised through successful
execution will have a direct impact on the debt reduction programme,
Moody's also believes that the Greek government's approach
to implementing this programme is a valuable signal of its ability and
willingness to overcome broader political and institutional challenges
to the reform process. During the review, Moody's will
assess the credibility of the privatisation targets and consider what
steps the government plans to take to avoid the privatisation process
being materially delayed by these factors. State asset sales realised
during the review process could be considered during the review process.