The Greek bankruptcy, pardon, sovereign liability management exercise, pardon reprofiling, is once again front and center in the news this morning, after Moody's had some words of caution about a broad spillover effect in Europe should Greece file. From Reuters: "A Greek debt default would hurt other peripheral euro zone states and could push Portugal and Ireland into junk territory, Moody's said on Tuesday, warning it would classify most forms of restructuring as a default. "A Greek default would be highly destabilising and would have implications for the creditworthiness of issuers across Europe," Moody's Investors Service's chief credit officer in the region, Alastair Wilson, told Reuters in a telephone interview. "This would result in more highly polarised credit worthiness and ratings among euro zone sovereigns, with the stronger countries retaining very high ratings and the weaker countries struggling to remain in investment grade." And yet a Greek bankruptcy seems increasingly more inevitable after a brand new fissure has now appeared in the government, after the chief opposition, New Democracy, party leader Antonis Samaras said he would oppose the latest round of austerity which, nonetheless, must pass in order for Greece to not run out of funds in 2 months, as we previously reported, and finally set off the dominoes. While the political bickering will likely hit fever pitch, and result in new and increasingly more violent protests in Athens, it is likely that austerity will pass as western banks are licking their chops at acquiring Greek "privatized" assets, at least when it comes to infrastructure and real estate, banks not so much, at below cost prices.
From Moody's warning on spillover effects:
Wilson said the focus after any Greek default would be on Portugal and Ireland, which like Greece have agreed to receive international bailouts from the European Union and the International Monetary Fund.
Asked if these two countries would risk falling into junk territory in the event of a Greek default, he said: "Potentially yes...If there were to be a Greek default, there could potentially be multi-notch downgrades to the weakest sovereigns."
He said Spain, Italy and Belgium were not in the same category as Portugal and Ireland, but would also come under significant market pressure and could face rating downgrades.
"It would be expected though that even the slightly stronger euro zone sovereigns would come under significant market pressure and very likely face higher cost of accessing the wholesale funding market," Wilson said.
He declined to say how likely it was that Greece would actually default on its debt.
Greece announced on Monday 6 billion euros worth of new fiscal steps to cut its budget deficit as well as plans to jumpstart privatisations, in an effort to convince lenders it can pay off debt without a restructuring.
Finance Minister George Papaconstantinou said Greece would not be able to honour its obligations if it did not obtain the next tranche of bailout loans. The IMF has made clear it cannot disburse money if Greece's 2012 EU funding is not assured.
The three major ratings agencies, Moody's, Fitch and S&P, have all warned they would probably consider even a "soft" debt restructuring by Greece, in which investors were given the option to accept a deal but not explicitly forced to accept one, a default.
In a statement on Tuesday, Moody's said: "A Greek default might take many forms, including changes in terms and conditions, selective 're-profiling' and large-scale 'voluntary' debt buybacks at high discounts, which Moody's classifies as distressed exchanges."
Wilson said that even forms of debt restructuring such as voluntary swaps of bonds, with credit enhancements for old bonds to support their net present values, were highly likely to be classified as defaults.
And as to why riots in Athens are about to spike once again...
The leader of Greece's conservative political opposition on Tuesday rejected the government's new package of fiscal measures to slash deficits, saying it would not help the economy to recover.
"I am not going to agree to this recipe which has been proven wrong," New Democracy party leader Antonis Samaras said after a meeting with Prime Minister George Papandreou.
The government enjoys a comfortable majority in parliament but Papandreou is seeking wider political consensus before taking additional austerity measures to exit a debt crisis.