And Moody's...

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 targets; and

(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.

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