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Greece downgraded to "restricted default"

11. March 2012. | 12:45

Source: Emg.rs. Voice of Russia

Experts at Moody`s ratings agency have downgraded Greece`s rating from C to Restricted Default (RD) following the agreement signed between the Papadimos Cabinet and private creditors on Friday.

Experts at Moody`s ratings agency have downgraded Greece`s rating from C to Restricted Default (RD) following the agreement signed between the Papadimos Cabinet and private creditors on Friday.

Since Athens can no longer cope with its debts, assistance from the euro zone remains a key goal for Greece. Now that the country has received a second bailout package from the IMF and the European Central Bank, Brussels is setting new terms for further assistance. Athens is very reluctant to make any concessions.

A €130 billion bailout package was approved for Athens in late February in exchange for an agreement which Greece had to sign with private investors to restructure big debt sums from the country`s obligations. The talks resulted in most creditors accepting the terms of the deal, while those who rejected the idea were said that they would be forced to join.

It is believed that this unprecedented deal with investors will save Athens from facing an uncontrolled default. This, however, did not prevent Moody`s rating agency from downgrading Athens.

Some experts say that statements made by rating firms do not deserve much attention. The head of the Social Policy Institute of the Moscow-based Higher School of Economics, Sergey Smirnov, shared his opinion with the VoR: “We know what these rating agencies are all about. Very often, they are paid to issue their downgrade verdicts. I would rather heed to what governments say: finance ministries, or influential managing bodies that do not deal with abstract forecasts but with problems related to Greek financial crisis. I think that all efforts will be taken to avoid the worst case scenario.”

Greece is expected to complete the bond swap by March 12. After that, the EU and the IMF will offer the first tranche of the 130 billion euro loan. Part of the loan will be used to pay off debt obligations and compensate surviving banks for their losses.

Moody's comments on Greek debt exchange

Moody's Investors Service says that it considers Greece (C/no outlook) to have defaulted per Moody's default definitions further to the conclusion of an exchange of EUR177 billion of Greece's debt that is governed by Greek law for bonds issued by the Greek government, GDP-linked securities, European Financial Stability Facility (EFSF) notes. Foreign-law bonds are eligible for the same offer, and Moody's expects a similar debt exchange to proceed with these bondholders, as well as the holders of state-owned enterprise debt that has been guaranteed by the state, in the coming weeks. The respective securities will enter our default statistics at the tender expiration date, which is was Thursday 8 March for the Greek law bonds and is currently expected to be 23 March for foreign law bonds. Greece's government bond rating remains unchanged at C, the lowest rating on Moody's rating scale.

Moody's understands that 85.8% of debtholders holding Greek-law bonds issued by the sovereign have agreed to the exchange, with the vast majority of remaining bondholders likely to be drawn in following the exercise of Collective Action Clauses that will be inserted pursuant to a recent Act by the Greek parliament. The terms of the exchange entail a discount -- a loss to creditors -- of at least 70% on the net present value of existing debt.

According to Moody's definitions, this exchange represents a 'distressed exchange', and therefore a debt default. This is because (i) the exchange amounts to a diminished financial obligation relative to the original obligation, and (ii) the exchange has the effect of allowing Greece to avoid payment default in the future. (See also http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_134141.)

Moody's announcement has no implications for Greece's issuer rating, which remains C. Moody's does not use a 'Default' or 'Selective Default' rating, but rather maintains ratings on securities in default that are indicative of the magnitude of expected losses to investors. The securities subject to the default are listed at the end of this announcement.

Moody's will revisit Greece's rating in due course to assess the impact of the exchange on the sustainability of Greece's debt burden together with other relevant factors, including Greece's likely compliance with measures that are a condition of external support and its growth prospects.

Moody's had downgraded Greece's sovereign rating to C from Ca on 2 March 2012 further to the announcement of the debt exchange proposals. Moody's had assessed these as implying expected losses to investors in excess of 70%, which is consistent with the rating agency's criteria for a C rating. At the time, Moody's had said that the risk of a default, even after the debt exchange has been completed, remains high.


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