Moody’s downgrades Greece to A2

Posted by FT Alphaville on Dec 22 08:09.

It looks like Moody’s has finally barked.
Following in the footsteps of Fitch and S&P, the ratings agency has downgraded Greece to A2 from A1 on Tuesday morning. Fitch and S&P already have the Hellenic Republic on BBB+.
The move means Greek debt is one step closer to being cut off from eligibility as ECB collateral. Crucially though, Moody’s doesn’t think the central bank would let that happen…
Here’s the full press release, with our highlights:
London, 22 December 2009 — Moody’s Investors Service has today downgraded Greece’s government bond ratings to A2 from A1. Today’s rating action concludes the review for possible downgrade initiated by Moody’s on 29 October 2009. The outlook is negative.
This rating action does not affect the ratings of Greece’s country ceilings for bonds and bank deposits, which remain Aaa (like the rest of the Eurozone).
“Greece’s repositioned rating of A2 balances the Greek government’s very limited short-term liquidity risks on the one hand, and its medium- to long-term solvency risks on the other,” says Sarah Carlson, Moody’s lead sovereign analyst for Greece. Moody’s notes that the country’s longer-term risks have only partly been offset by the government’s announced policy response.
Moody’s had initiated its review of Greece’s A1 sovereign rating in response to mounting evidence that the government’s long-term credit strength was eroding materially. In particular, the rating agency intended to assess the new government’s policy intentions and its room for manoeuvre.
“Moody’s believes that Greece is extremely unlikely to face short-term liquidity/refinancing problems unless the European Central Bank decides to take the unusual step of making the sovereign debt of a member state ineligible as collateral for bank repurchase operations — a risk that we consider very remote,” says Arnaud Mares, Senior Vice President in Moody’s Sovereign Risk Group.
Moreover, as evidenced by other support operations within the EU, Moody’s indicated that there are potentially other means to mobilize emergency liquidity funding should it be required — but Moody’s does not believe that this will be necessary.
Moody’s also does not believe that the Greek government’s difficulties represent a vital test for the future of the eurozone, but rather a repricing of relative risks that had been concealed by years of abundant global liquidity and somewhat above-potential growth.
“The Greek government’s credit challenges are of a longer-term nature,” explains Ms. Carlson. “They stem from a slow erosion in competitiveness and economic potential, which implies that the government’s debt problem cannot be resolved by growth alone. They also result from chronically weak fiscal institutions, which cast a shadow over the government’s ability to implement decisive fiscal retrenchment in order to restore debt sustainability.”
Furthermore, the combination of a global post-crisis environment that is less favourable to Greek public finance dynamics (with increased risk discrimination and muted global demand) and an equally challenging domestic environment (with accelerating demographic pressure on public finances in coming years) will make any fiscal adjustment increasingly difficult and costly to postpone. However, Moody’s continues to think that a migration of liabilities from the banks’ balance sheets to that of the sovereign is unlikely.
Moody’s acknowledges that last week’s announcements by the Greek government clearly identify these weaknesses and pave the way for a lasting solution. However, the long-term credit standing of Greece will depend on the Greek population’s acceptance of these measures and the government’s vigorous implementation of them. “As neither of these can be taken for granted, and because these measures will also take time to bear fruit, Moody’s has placed a negative outlook on the Greek government’s new A2 rating,” says Ms. Carlson.
At A2, Greece’s bond rating compares with those of other high-income but highly indebted countries that do not face external payment vulnerabilities. However, the rating is positioned well below those of Belgium, Ireland or Italy (which are rated at Aa1-Aa2) to reflect Greece’s poor track record in terms of real fiscal adjustment. Greece’s rating also remains higher than Baa-rated Mexico, Brazil or Hungary, all of which have better or similar debt metrics but much lower income levels. These countries also do not benefit from the protection against external payment crises afforded by Greece’s membership in the European Monetary Union.
Looking ahead, the question of whether the negative outlook will evolve into a stable outlook or into a further downgrade will depend on the Greek government’s plan being followed through — as demonstrated for instance by a sustained increase in tax revenues and/or the effectiveness in reining-in expenditure.
Moody’s last rating action with respect to the government of Greece was on October 29, 2009, when its A1 long-term debt ratings were placed on review for possible downgrade.
The principal methodology used in rating the government of Greece is Moody’s Sovereign Bond Methodology, published in September 2008, which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody’s website.

Related links:Moody’s whip hand over Greece – FT Alphaville
Please have confidence in us! – FT Alphaville
How do you say vicious circle in Greek? – FT Alphaville