Oh, this is beginning to feel like the crisis all over again in at least two respects: news events taking place on the weekend (well at least from the US perspective) and multiple wobblies happening at the same time.
Frankly, Greece should have been rated junk long before it was relegated to that terrain (note this Moody’s downgrade just takes Greece further into speculative territory, from Caa1 to Ca, which is a degree of refinement that many might deem to be irrelevant). And I’m told by a former ratings agency employee that the agencies have absolutely no methodology for rating countries (although given how well their methodologies worked in structured credit, this shortcoming probably means less than it ought to).
But at least the narrative is pretty realistic. From the Wall Street Journal:
Moody’s Investors Service slashed the Greek government’s debt ratings three notches further into junk territory Monday, citing the likelihood that private creditors will suffer “substantial” losses on their holdings of government debt…
In a statement, Moody’s said the program announced by the European Union indicated that the likelihood of a distressed exchange and a default on Greek government bonds was “virtually 100%.”
“Looking further ahead, the EU program and proposed debt exchanges will increase the likelihood that Greece will be able to stabilize and eventually reduce its overall debt burden,” Moody’s said.
It added that Greece’s support package would also benefit other members of the euro zone by curbing the severe risk of near-term contagion that would probably have resulted from a disorderly payment default or large haircut on outstanding Greek debt.
“However, Greece will still face medium-term solvency challenges: its stock of debt will still be well in excess of 100% of (gross domestic product) for many years and it will still face very significant implementation risks to fiscal and economic reform,” Moody’s said.
In other Greek news, the Financial Times reports that some banks are balking at the demand that they “contribute” to the deal announced last week:
The UK’s Royal Bank of Scotland, Germany’s DZ Bank and LBBW and Austria’s Erste Bank, which between them hold about €3bn of Greek sovereign debt, are among the lenders that have not yet committed to take part in a programme that will see participants swap or roll over their Greek debt for bonds that mature in 30 years.
Senior bankers said considerable uncertainty remained about the details of the Greek bail-out plan and its likely application. Even the level of projected participation of private-sector bondholders – which the European Union said would be €37bn over the next three years, and the Institute of International Finance, which has co-ordinated bondholders, said would be €54bn – has caused widespread confusion.
In fact, the discrepancy is straightforward – the €54bn is indeed the amount that the banks expect to commit to Greece, assuming that there is 90 per cent take-up of the rollover or exchange plan, but the €37bn is what Greece would actually receive, net of €16.8bn of the “credit enhancement” programme.
Credit enhancement is the name for the mechanism by which Greece will be obliged to reinvest 20 per cent of its sovereign funding into an insurance vehicle collateralised with triple A debt to guard against future default.
If banks aren’t certain how the deal works, that suggests a pretty basic problem in communications. Yowza.