Moody’s worried over uncertainty in Greece

Moody’s Investors Service placed Greece’s Caa1 government bond rating on review for downgrade on Friday due to “the high level of uncertainty over the outcome of the negotiations with its creditors over the terms of Greece’s support programmer” which expires at the end of February.

The rating agency said that “the outcome could potentially have negative implications for Greece’s ability to meet its funding and liquidity needs and for the probability of default on marketable securities,” adding, however, that the rating applies to marketable securities only.

Moody’s said its review will assess the likely outcome of the negotiations recently initiated between the newly-elected government and the euro area authorities – the European Commission and European Central Bank. In particular, it will assess the government’s ability to secure its medium term financing capability through an extension or amendment to its current support programme with the EC, which would likely also allow Greek banks to maintain access to ECB financing facilities.

In Moody’s view, “there is considerable uncertainty regarding the outcome of the ensuing negotiations, and the ability of the two sides to reach an agreement which secures Greece’s financing position.”

The rating agency noted that Greek government has been vocal about its political mandate to roll back austerity measures, reduce primary budget surplus targets and negotiate a debt reduction agreement with its creditors. However, other euro area governments are likely to resist such demands given their policy stance in recent years and because further debt relief could undermine debt consolidation efforts elsewhere in the euro area.

Moody’s said that delays to official-sector disbursements of EUR 7.2 bln that were due last year have exacerbated Greece’s liquidity and funding challenges. In 2015, Greece has to repay EUR 16 bln in long-term debt, roll over outstanding T-bills of EUR 14.6 bln and make EUR 4 bln in interest payments to private and official creditors. The first large repayment of EUR 3.5 bln is due on July 20, followed by another repayment for EUR 3.2 bln on August 20, both for marketable securities held by the ECB. The first half of the year also requires the government to roll over EUR 11.6 bln of T-bills, and Moody’s sees ECB support for the Greek banking sector as a key determinant of its ability to achieve the rollover.

On Monday, Moody’s downgraded by one notch the longterm deposit and senior debt ratings of Piraeus Bank (to Caa2 from Caa1), National Bank of Greece (to Caa2 from Caa1), Alpha Bank (to Caa2 from Caa1), Eurobank Ergasias (to Caa3 from Caa2) and Attica Bank (to Caa3 from Caa2). All ratings were placed on review for further downgrade.

The rating agency said its downgrades were driven by Moody’s view of a reduced likelihood of systemic support given the heightened uncertainty about the government’s ability to come to an agreement with official creditors in time to meet its own liquidity and funding needs, and the likely reduction in the Hellenic Financial Stability Fund’s (HFSF) capacity to support the banks in case of need.

Moody’s considers that there is a material risk that the bulk of the HFSF’s reserves of EUR 11.5 bln could be either used to finance government needs or returned back to the European Financial Stability Facility (EFSF), reducing the capacity of the HFSF to support the banks if needed.

As a result, Greek banks’ dependence on Eurosystem funding, both in the form of ECB funding and higher cost emergency liquidity assistance (ELA) from the Bank of Greece, has increased significantly.

According to the Bank of Greece, ECB funding for the system increased to EUR 56 bln as of end-December 2014, from 45 bln in November. Moody’s expects this balance to have increased to EUR 75 bln in January 2015.

The rating agency also placed on review for downgrade the Ba3 corporate family rating (CFR) and the Ba3-PD probability of default rating (PDR) of Hellenic Telecommunications Organisation S.A. (OTE). Concurrently, it placed on review for downgrade the provisional (P)Ba3 senior unsecured ratings of the global medium-term note programme (GMTN) and the Ba3 rating of the global bonds issued by subsidiary OTE Plc (OTE’s fully and unconditionally guaranteed subsidiary).

“While OTE has taken steps to insulate itself from the Greek economy, the company is predominantly a Greek business with 70% of its revenues generated in Greece,” said Carlos Winzer, a lead analyst for OTE. “As such, its ratings remain closely linked to conditions in its domestic environment. The government bond rating exerts pressure on OTE’s rating.”

On Thursday, DBRS Inc. placed the Hellenic Republic’s long-term foreign and local currency issuer ratings of B and short-term foreign and local currency issuer ratings of R-4 “under review with negative implications”.