A Greek debt default would hurt other peripheral eurozone states, Moody’s said in a statement yesterday, becoming the last of the three major ratings agencies to say any kind of restructuring would constitute default.
“Moody’s believes that a default is likely to have adverse credit rating implications for Greece, possibly some other stressed European sovereigns, and the Greek banks, regardless of the efforts made to achieve an ‘orderly’ outcome,” it said in a statement.
Markets piled pressure on heavily indebted eurozone countries at the start of the week as investors worried not just about Greece, but also about heightened risks in Spain, where the government was drubbed in regional elections, and ratings agencies’ warnings for Italy and Belgium.
S&P cut its outlook to “negative” from “stable” on Italy, which has the eurozone’s biggest debt pile in absolute terms, and Fitch Ratings said it may downgrade Belgium’s AA+ credit rating. The country has not had a proper government since elections in June last year, but is enjoying an economic boom.
“As for other stressed European sovereigns, Moody’s believes that their ratings will invariably be affected, regardless of the myriad forms that a default by Greece could take,” the statement said.
“This would in turn lead to increasingly polarized sovereign ratings in Europe, with stronger countries retaining high or very high ratings, and weaker countries struggling to remain in investment grade,” it said.
Greece announced on Monday 6 billion euros (US$8.4 billion) in new, emergency fiscal measures to shrink its budget hole and jump-start privatizations to convince lenders it can pay down debt without a restructuring.
Greek Finance Minister George Papaconstantinou said Athens would not be able to honor its obligations if it does not get the next tranche of a bailout loan and the IMF has made clear it cannot disburse the money if Greece’s EU funding next year is not assured.
Moody’s said a Greek default might take many forms, including changes in the terms and conditions or a selective reprofiling, adding that it would consider all of these as distressed exchanges.
The statement also said the Greek banking sector would need recapitalization in case of a sovereign default, as well as continued liquidity support from the European Central Bank. It warned that a sovereign default was likely to be accompanied by some form of default on bank debt.
Fitch cut Greece’s credit rating by three notches on Friday, pushing the country deeper into junk territory, and warned that any kind of debt restructuring would amount to default.
“The longer the current state of uncertainty affecting Greece persists, the greater the temptation on the part of both the Greek and the euro area authorities to try to undertake some form of debt restructuring,” Moody’s said.
Fitch on Monday cut the outlook for Belgium’s government bonds, citing the risk that political disagreements over the creation of a new government could hurt the country’s drive to lower debt.
Fitch affirmed the country’s AA+ rating, but the negative outlook means there is a chance it could be downgraded in coming months.
The outlook cut reflects “concerns over the pace of structural reform in the coming years and the ability to accelerate fiscal consolidation without a resolution to the constitutional crisis,” said Douglas Renwick, a director at Fitch’s sovereign group.