Moody's slashes cuts Greek rating four notches to Ba1

14th June 2010, Comments 0 comments

Moody's rating agency slashed its rating for Greece by four notches on Monday from A3 to Ba1, dropping it to speculative investment level on concerns about how it may repay its debts.

Moody's said that considerable uncertainty about Greek plans, even with the help of an EU-IMF 110 billion euro bailout package, to reduce its massive debt and balance its public finances justified the ratings cut.

"This uncertainty represents a risk that leads Moody's to believe that Greece's creditworthiness is now consistent with a Ba1 rating, a rating which incorporates a greater, albeit, low risk of default."

Moody's cut Greece's sovereign rating by one notch from A2 to A3 on April 22, warning then that a review might lead to another reduction.

It said Monday the review was now complete and the ratings outlook stable.

"The Ba1 rating reflects our analysis of the balance of the strengths and risks associated with the Eurozone-IMF support package," it said.

"The package effectively eliminates any near-term risk of a liquidity-driven default and encourages the implementation of a credible, feasible, and incentive-compatible set of structural reforms, which have a high likelihood of stabilizing debt service requirements at manageable levels," said Sarah Carlson, Moody's lead analyst for Greece.

"Nevertheless, the macroeconomic and implementation risks associated with the programme are substantial and more consistent with a Ba1 rating."

Moody's said the stable outlook reflected "the substantial probability that the rating will not change over the next 12 to 18 months."

In late April, Standard & Poor's downgraded Greece's sovereign debt to junk status, adding to the pressure on the country just before it agreed the May deal with the EU and International Monetary Fund.

Fitch, the other major international ratings agency, warned in late May that it might cut Greece to junk status because its debt was still likely to soar to 150 percent of Gross Domestic Product despite the bailout deal.

Lower debt ratings reflect higher risk, making it more expensive for the affected borrower to raise money on the international markets.

As a eurozone member Greece, was supposed to have kept debt to 60 percent of GDP and its public deficit to three percent, compared with nearly 14 percent last year, but lax controls saw those limits set by the wayside.

As part of the conditions for the EU-IMF aid, Athens agreed to stinging spending cuts and higher taxes in an effort to restore the public finances to health, with the public deficit supposed to be under three percent by 2014.

The crisis in Greece spilled over into other weaker eurozone countries such as Spain and Portugal, with Brussels and the IMF agreeing a one trillion dollar backstop package last month in an effort to hold the line.

In recent weeks, concerns about the European debt crisis have eased somewhat as governments have taken stiff remedial measures but there are concerns that cutting too sharply could simply undermine a tentative economic recovery.

© 2010 AFP

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