Moody’s wor­ried over un­cer­tainty in Greece

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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”.

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