2.6.2011

By Simon Miller

Greece has an "even chance" of defaulting according to rating agency Moody's.

Wednedsay night saw Greek bonds being downgraded by Moody's from B1 to Caa1, pushing them further into junk status and pushing Greece to the bottom of Moody's league table of credit-worthy European countries.

Moody's believed there was an increased risk that Greece will fail to stabilise its debt position, without a debt restructuring, "in light of (1) the ever-increasing scale of the implementation challenges facing the government, (2) the country's highly uncertain growth prospects and (3) a track record of underperformance against budget consolidation targets".

In addition, Moody's warned that the IMF, European Central Bank and EU Commission (The Troika) will, at some point in the future, " require the participation of private creditors in a debt restructuring as a precondition for funding support".

"Taken together, these risks imply at least an even chance of default over the rating," said Moody's.

However, the ratings agency added: "Nevertheless, Moody's does not believe that a restructuring of Greece's debt is inevitable. This is because a default in the short term would very likely be highly destabilising, and the full impact on Europe's capital markets would be hard to predict and harder still to control. The fallout would have implications for the creditworthiness of issuers across Europe. These factors represent an incentive for Greece's supporters to continue to support the country, at least for a few more years."

The downgrade occured as German officials were forced to reassure markets that the Troika was committed to bailing out Greece.

German finance minister Martin Kotthaus told reporters: "It was designed jointly. It will be evaluated jointly, and I also assume that it can only be continued jointly, including when it comes to the question of payouts of future tranches."

Greece is due to receive a €12bn injection on 29 June but last week chairman of the Eurozone finance ministers council, and Luxembourg prime minister, Jean-Claude Juncker warned that the IMF could block the next payment in Greece’s bail-out.
He said that the IMF could only release funding when there has been a financing guarantee for the 12-month period.

As such Juncker was unsure that the Troika would come to the conclusion that this condition has been met.

"I don't think that the troika will come to the conclusion that this is given. If the Europeans have to realize that the disbursement of the IMF before 29 June can't operatively happen, the expectation of the IMF is then that the Europeans will take the place of the IMF," he said.

Greece has to commit to extensive cuts and an agressive privatisation programme to receive the bailout but these are being resisted internally by politicians.

Kotthaus added: "It must be made crystal clear how these privatisation announcements and plans can be executed concretely, tangibly, and comprehensively so that all further delays and such can be avoided."