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Moody's Downgrades Greece To Just A Few Notches Above Default: From B1 To Caa1, Outlook Negative

Tyler Durden's picture


Next up: Greece begins criminal proceedings against the rating agency for character defamantion and libel (or is that slander?). Also, Belgium is next. Yet most importantly, there is no mention in the downgrade if the "Vienna plan" currently contemplated, or the latest zany "debt rolling" proposal constitutes an Event Of Default, meaning the market will have even more uncertaintly to grapple with.

Moody's downgrades Greece to Caa1 from B1, negative outlook

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.
The first trigger for today's downgrade is Moody's view that Greece is increasingly likely to fail to stabilize its debt ratios within the timeframe set by previously announced fiscal consolidation plans. The Greek government failed to achieve a number of the fiscal consolidation targets in 2010 as a result of fiscal shortfalls (both spending cuts and revenue collections) at the general government level and persistent weaknesses in tax collection. It has also become readily apparent that, under current policies, Greece is unlikely to meet its previously announced budget targets for 2011. These shortfalls have occurred in part because GDP growth has been weak -- in fact, the recession was deeper than was expected in 2010, and 2011 growth forecasts have been revised downwards. Moreover, in the coming weeks, Moody's expects the announcement of further fiscal austerity measures, which are likely to depress growth in 2011. This may in turn further weaken the political consensus within Greece to endure all the adjustments mandated by the reform package.
The expectation of a repeated failure to meet targets carries two implications. First, Greece is unlikely to return to the credit markets in 2012 for funding, and will require additional financial assistance from the Troika in order to avoid a default. The quid pro quo for such assistance will inevitably be further fiscal austerity and economic reform measures that will be necessary to address the shortcomings of the programme to date. Second, Moody's believes that raising the austerity bar still higher will further increase implementation risk for the Greek programme.
Heightened implementation risk in turn underpins the other key driver of today's downgrade to Caa1. Namely that the increased likelihood that the Troika will make the provision of financial assistance to Greece over the medium term conditional on a debt restructuring, in which private sector creditors would absorb some economic losses. Moody's believes that the public discussion about current policy options -- including the possibility that financial assistance to Greece may be delayed or suspended -- indicates that officials' cost-benefit analysis of a Greek restructuring is shifting.
In light of recent comments by EU and IMF officials, Moody's believes that Greece is running out of options, and that heightened implementation risk inherent in any new programme also increases the probability of a default event. This view is supported by the following observations:
- Greece's large debt burden means that, even under the most positive scenarios, the country's debt sustainability will remain vulnerable to adverse macroeconomic developments, shocks to the Greek financial system or shifts in market sentiment for years to come. This will be true even if additional liquidity support is given to the government and if the full EUR50 billion privatisation programme is implemented on schedule.
Regardless of how strong the incentives to prevent Greece from defaulting, the longer the reform programme takes to be seen to be having its desired effect on debt sustainability and the longer that Greece needs to rely on support from the Troika, the more likely a default becomes.
- Further fiscal austerity is likely to deepen and prolong the recession and further undermine domestic political support for the reform programme. A failure to secure broad political support for the country's fiscal and economic reform package would threaten the programme and increase policy instability.
Nevertheless, Moody's does not believe that a restructuring of Greece's debt is inevitable. This is because a default in the short term would very likely be highly destabilising, and the full impact on Europe's capital markets would be hard to predict and harder still to control. The fallout would have implications for the creditworthiness of issuers across Europe. These factors represent an incentive for Greece's supporters to continue to support the country, at least for a few more years.
Further funding does not make it easier for the government to comply with the fiscal and structural reform programmes, but it does buy the government time to implement these plans and allow positive domestic dynamics to build. While it is not Moody's base case assumption, the large volume of structural economic reform in the Memorandum of Understanding (MoU) has the potential to reinvigorate the economy and generate substantially higher economic growth over the medium term.
Moreover, the Greek state has substantial assets in excess of the EUR50 billion privatisation target that could in principle be mobilised to reduce debt. Of course, this would require the Greek government to be willing to sell these assets and willing buyers to be found for them.
Greece's Caa1 rating incorporates Moody's assumption that further official support will be available to the Greek government over the short term, and that additional austerity and structural reform measures will be announced over the next month.
Moody's would downgrade Greece's rating further if it transpired that the Greek government's compliance with the conditions stipulated in the MoU is materially weakening, and that, as a result, there is a rising risk that additional funding will not be forthcoming. Any announcement of a programme that includes conditions that satisfy Moody's definition of default would also lead to further downgrades.
Moody's would upgrade Greece's rating if the pace of fiscal consolidation and/or structural reform implementation were to proceed much more rapidly than Moody's currently expects. An upgrade could also follow if key drivers of the debt dynamics -- such as economic growth, interest rates, privatisation revenues or the ability to generate large primary surpluses
-- were seen to be evolving in a way that would significantly accelerate the pace of debt reduction.


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Wed, 06/01/2011 - 14:53 | 1329749 Fish Gone Bad
Fish Gone Bad's picture

Everybody saw this coming, right?

Wed, 06/01/2011 - 15:02 | 1329766 max2205
max2205's picture

Guys at Moody's are forward looking geniuses...sic

Wed, 06/01/2011 - 15:04 | 1329775 max2205
max2205's picture

Now would be a great time for Dick(head) Bove to go outperform on the financials

Wed, 06/01/2011 - 18:10 | 1330553 Hard1
Hard1's picture

Indeed, they look at the 5yr CDS and assign their best guess of the corresponding rating to the last month moving average.  If they are way behind the curve and don't want to make too suddden moves, they move 1-2 notches and assign the corresponding outlook.

Wed, 06/01/2011 - 14:53 | 1329750 Deep
Deep's picture

But but, Cramer said this rally is unstopable yesterday. Is he wrong?

Wed, 06/01/2011 - 15:03 | 1329769 Arius
Arius's picture

no - never, i would not bet against Cramer...

Wed, 06/01/2011 - 15:14 | 1329820 Spirit Of Truth
Spirit Of Truth's picture

How apt since we were likely at the edge of a cliff when Cramer commented:

Wed, 06/01/2011 - 14:58 | 1329753 Caviar Emptor
Caviar Emptor's picture

Greece responds by downgrading Netflix

Thu, 06/02/2011 - 04:10 | 1330547 edotabin
edotabin's picture


How? Gpap's lines are all tied up on calls to the public prosecutor's office.

At this point, I think he is using the bailout money to buy lottery tickets in all nations around the world. Win a lotto here and powerall there...... it adds up man!

Now, I just gotta check up on my boy Van Rompuy. You know, to see how he's doin' and to make sure he has it all under control.

Seriously though, after all the depressing stuff we read every day it is good to see a sense of humor. Maybe the sarcasm is a defense mechanism... Who knows?!?! Either way, thanks for the laugh.


Wed, 06/01/2011 - 19:34 | 1330795 downwiththebanks
downwiththebanks's picture

Greece responds by downgrading the criminal Banker-Gangster lackeys at Moodys.

Wed, 06/01/2011 - 22:03 | 1331185 Milestones
Milestones's picture

No, if they're smart is take the $$$ and invest the first $150MM i ground to air missles and the next $1BB in good tanks from Russia and some subs; then default and tell the EU to get fucked.  Milestones

Wed, 06/01/2011 - 14:55 | 1329754 buzzsaw99
buzzsaw99's picture

opinions are like assholes.

Wed, 06/01/2011 - 17:49 | 1330473 Problem Is
Problem Is's picture

Some are bigger than others??

Wed, 06/01/2011 - 19:37 | 1330797 downwiththebanks
downwiththebanks's picture

So are lying, idiotic rating agencies.

Wed, 06/01/2011 - 14:58 | 1329755 LRC Fan
LRC Fan's picture

Just another false alarm.  Buy stocks.  Robo told me XLF is a good pick

Wed, 06/01/2011 - 14:59 | 1329758 digalert
digalert's picture

Pretty bold move by Moodys, goin out on a limb like that. hah

Wed, 06/01/2011 - 15:03 | 1329770 lizzy36
lizzy36's picture

But the EU has a BRILLIANT NEW plan for Greece (doesn't reek of desperation at all):

European Union officials are examining how Greek state assets marked for privatisation could be used as security for Greek government bonds to be sold to banks, EU sources said on Wednesday.

Such an arrangement could provide an additional leg of financial support for Greece as it attempts to obtain fresh aid from other euro zone governments and the International Monetary Fund. At present Athens is unable to borrow money from the markets at affordable rates.

The idea could also be used as an incentive to persuade commercial banks to roll over their exposure to Greece when their existing holdings of Greek government bonds mature. EU officials have been considering the concept of a rollover but it remains unclear how banks could be persuaded to participate. Under the proposal to use state assets as security, Athens could employ assets which it is reluctant to sell off or unable to sell quickly, the sources said -- although such a scheme might be opposed by holders of existing Greek debt who did not benefit from the security, such as the European Central Bank.

Wed, 06/01/2011 - 15:05 | 1329785 Tyler Durden
Wed, 06/01/2011 - 15:13 | 1329818 Sockeye
Sockeye's picture

That is so much cooler than saying something lame like "google is your friend"!
(how'd you do that?!!!)

Wed, 06/01/2011 - 15:23 | 1329845 cougar_w
cougar_w's picture

If you liked that then you might enjoy watching this:

Wed, 06/01/2011 - 15:58 | 1330027 NotApplicable
NotApplicable's picture

Wow, a realtime display of snark filler. That is both scary and cool all at the same time. It needs a scroll bar, though.

LOL, just saw "am I an idiot" go by. I'll bet somebody enjoyed clicking on that LMGTFY link.

Wed, 06/01/2011 - 16:09 | 1330064 cougar_w
cougar_w's picture

It needs a scrollbar and a "best of" section.

Though I suppose grade-A snark is it's own reward.

Wed, 06/01/2011 - 19:42 | 1330824 euclidean
euclidean's picture

TD, how is this any different to the rating of US cow shit as AAA caviar during the mark to fantasy dream run of 2004-2011? How the f*ck are US ratings agencies even taken seriously since? (rhetorical question)

Inverse flip - the US doesn't know how to accept defeat, and suffers from scorched orgy syndrome. If the US cannot control the orgy, then everyone is going to get a good reaming. You are the pin, and not the cushion I take it?

But look, am happy to swallow more of the orgy juices if enough people believe this US ratings bullshit. Forget internet falsehoods, MSM loves feeding wholesome misinformation and unfounded facts to the masses.

Wed, 06/01/2011 - 15:22 | 1329851 traderjoe
traderjoe's picture

Of course, under fractional reserve banking, banks create money out of thin air, taking collateral of productive assets, and charging interest for the priviledge. Yea- that makes sense.

Wed, 06/01/2011 - 15:03 | 1329772 carbonmutant
carbonmutant's picture

We're waiting for the EU to announce their own ratings agency...

It's clear that there is an obvious bias in having a US agency reporting on EU


Wed, 06/01/2011 - 15:04 | 1329783 IEVI
IEVI's picture

This is great news...should be no problem to get ES green in the next hour.

Wed, 06/01/2011 - 15:05 | 1329784 Caviar Emptor
Caviar Emptor's picture

Moody's downgrade outdone by Fitch, downgrading Greece to "Refuse" from "Rubbish" 

Wed, 06/01/2011 - 15:04 | 1329792 Lord Welligton
Lord Welligton's picture

Next up: Greece begins criminal proceedings against the rating agency for character defamantion and liber (or is that slander?).

Well it's certainly not "liber".


Wed, 06/01/2011 - 15:10 | 1329806 Duuude
Duuude's picture

 No, it's slandel

Wed, 06/01/2011 - 15:07 | 1329803 Cdad
Cdad's picture

Greece smeesh.

I understand there is a slight problem in Greece...however, we all know that Netflix is the key to global economic growth and stock market stability.  That being said, a ten fold increase in the price of one of its contracts is NOT, I'm sure, a real problem:

Brilliant!  Good thing the HFT geniuses have been running it up the flag pole for weeks.  Are these things connected?  Not sure.  We all know that criminal syndicate Wall Street bankers always play by the rules, and they would never mark something up and then buy puts on it right before the sell it into oblivion.

And everyone knows that streaming movies feed a hungry nation.

As for one could have seen that one coming, either.

Wed, 06/01/2011 - 16:03 | 1330035 Alienated Serf
Alienated Serf's picture

+ lul

"we all know that Netflix is the key to global economic growth and stock market stability."

Wed, 06/01/2011 - 15:07 | 1329804 PaperBear
PaperBear's picture

I just want to know when the COMEX defaults on it's silver future contracts.

Last time I heard there was only 32 MN oz of registered silver.

Anyone ?

Wed, 06/01/2011 - 15:07 | 1329805 TooBearish
TooBearish's picture


Wed, 06/01/2011 - 15:10 | 1329807 rajc
rajc's picture

i am sure more coming TomorroW ;)

Wed, 06/01/2011 - 15:11 | 1329808 orangedrinkandchips
orangedrinkandchips's picture

Moody's debt rating is like Magic Johnson being a commentator for the NBA.


"well, the team who plays the best defense and scores the most points wins...."


Moodys might as well come out and venture a guess that...yes..the sun will come out tomorrow (sorry annie)


too rich....

Wed, 06/01/2011 - 15:11 | 1329812 Caviar Emptor
Caviar Emptor's picture

Greek prime minister proposing national bake sale to raise funds

Wed, 06/01/2011 - 15:13 | 1329817 buzzsaw99
buzzsaw99's picture

Moody's: For the right price Greece could be AAA ;) ;)

Wed, 06/01/2011 - 17:48 | 1330484 Problem Is
Problem Is's picture

Hey Greece! Change your name to Abacus...

Wed, 06/01/2011 - 15:14 | 1329824 Caviar Emptor
Caviar Emptor's picture

Shaq announces on Twitter that he'll retire. Explains market drop

Wed, 06/01/2011 - 15:19 | 1329836 johngaltfla
johngaltfla's picture

Uh, isn't this like saying a black cat is black?

The sky is blue?

The market is rigged?

If nobody saw this one coming, they ain't been paying attention....

Wed, 06/01/2011 - 15:19 | 1329837 carlo
carlo's picture

Bada bing !  The dip buyers takin a rare beating today

Wed, 06/01/2011 - 15:22 | 1329842 geno-econ
geno-econ's picture

Europe will be inundated with Greek Diners on every corner of every city, accepting only gold or silver for a gyro or souflaki.

Wed, 06/01/2011 - 15:24 | 1329847 Dapper Dan
Dapper Dan's picture

Nice volume on the down side for the DOW, related to this news?

Wed, 06/01/2011 - 15:28 | 1329850 virgilcaine
virgilcaine's picture

Netflix is all that matters..! The HFT bots don't know/care of Greece. (Sarc.)  and it's Lehman x 10.  The troika knows the pain that flows.

Wed, 06/01/2011 - 15:26 | 1329853 TraderTimm
TraderTimm's picture

Forget the Fed and the banks. Time for something new. As a primer, here's a compelling list of reasons I found on the bitcoin forum to pull from your bank and use BTC instead.

All it needs is printing on some glossy brochure paper and left at a bunch of BoA, Citibank and other branches. Would be great for the looks on their customers faces, eh?



Wed, 06/01/2011 - 15:31 | 1329864 dwdollar
dwdollar's picture

At this point I question if a nuclear war would even take the DOW below 12k.

Wed, 06/01/2011 - 15:30 | 1329866 Quinvarius
Quinvarius's picture

They had to do something to prop the USD up today.  It was looking real bad for it to be dropping after the debt ceiling vote.

Wed, 06/01/2011 - 15:32 | 1329878 tradewithdave
tradewithdave's picture

If Greece were in America they would be protected by Citizens United v. FEC.  Such a rating would be considered hate speech against their corporate personhood. 

The court exempted Corporations from the Alien Tort Statute.  Now we know why.

You think I'm joking. 

Dave Harrison

Wed, 06/01/2011 - 15:45 | 1329940 Bonesetter Brown
Bonesetter Brown's picture

Greek bonds are a generational BUY!

Wed, 06/01/2011 - 16:07 | 1330057 vocational tainee
vocational tainee's picture

When do the british get a daa+ ?

Wed, 06/01/2011 - 16:17 | 1330127 Pablo Escobar
Pablo Escobar's picture

Anyone know how to get a message to TD?  Seems like Reuters is already preparing for the Greek Drachma.  Their most recent exchange rate table now includes the Greek Drachma, sans data......

Wed, 06/01/2011 - 16:41 | 1330255 oogs66
oogs66's picture

For anyone who is really bored, read what Moody's defines as B3 and what is Caa1.  Anyone believe they can distinguish that fine a line?

Wed, 06/01/2011 - 16:55 | 1330297 PulauHantu29
PulauHantu29's picture

"No one could have seen this coming," said the Bankers to Congress.

Wed, 06/01/2011 - 16:55 | 1330300 citta vritti
citta vritti's picture

Interesting now to see Greece and Portugal listed in 2009 among the small group of five (possibly seven) countries having “potential for graduation” to what the authors view as advanced economy status, that is with a strong likelihood of not being “debt intolerant” serial defaulters, based on data through 2008 (mainly it seems Institutional Investor sovereign ratings). See This Time is Different|Eight Centuries of Financial Folly by Carmen M. Reinhart & Kenneth S. Rogoff, pp. 284-287 (2009). The other candidates were Chile, China and Korea, with Malaysia and Poland “borderline”. 

Wed, 06/01/2011 - 19:34 | 1330794 Buck Johnson
Buck Johnson's picture

The magic word that is on everybodies mind is "Don't let Greece default".  All they are doing is delaying the inevitable, normally they would allow them to default.  They can't because there are banks in europe that are leveraged with the debt they bought from Greece and if they default it would be a domino in the banking system.  Because ask yourself if Greece is rated so badly to the point of default, then how in gods name are they going to get private financing to help keep them afloat.  All that is happening is that they run out of money from the ECB and go back for some more and the ECB gives it because they can't allow the banking system to implode.  Both Greece and ECB have each other by the throat.  Greek govt. won't do the austerity it needs because one it doesn't have a big enough tax base to do that (the country have 11 million people total, and maybe the amount of people of working age is 3 million).  And two, they are having these massive demonstrations and eventually the cops are just going to let them drag the politicians out and say we decided to not pay the debt.

Wed, 06/01/2011 - 21:44 | 1331135 ejhickey
ejhickey's picture

What is wrong with Caa1?  "C" is still passing isn't it?

Wed, 06/01/2011 - 22:16 | 1331219 Milestones
Milestones's picture


1) Take the $$$ never mind the terms

2) Take the first 1 Billion and buy ground to air missiles

3) Next 3 Billion on good Russian Tanks

4) Next Billion on land mines

5) Lots of Booze and then default and tell the E.U. to stick it where the sun don't shine.          




Thu, 06/02/2011 - 05:50 | 1331682 falak pema
falak pema's picture

that sounds like a milestone on the Via Appia...leading from Rome to Brindisi...road to hell of true military play...back to the generals of old; 1967, here we come!

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