Greece may default despite deal: Moodys

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Greece may default despite deal: Moodys

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The agency warned the debt swap could result in a severe weakening of the Greek banking system.

27 February,2012 03:44 pm

Greece will still be at high risk of defaulting despite the agreement last week on a rescue and part cancellation of its debt, credit rating agency Moodys said on Monday.The agency also warned that the terms of the debt swap could result in a severe further weakening of the capital base of the Greek banking system.Moodys Investors Service said that the 21 February announcement on support for Greece is an important step forward, but the risk of a default even after this distressed exchange (of bonds) is completed remains high.The agencys senior analyst Sarah Carlson said in Moodys weekly review of worldwide events affecting credit markets that Greeces debt burden will remain large for many years, and the country is unlikely to be able to access the private market after the second assistance package runs out.She continued: The outcome of elections, expected in April, also constitutes a source of political and implementation risk.She said that in coming days, Moodys would comment further on the implications of the agreement completed on February 21.On Tuesday, after a week of extremely tense negotiations, the eurozone accepted promises from Greece of new budget measures to correct public finances and reforms to make the economy more efficient, and on condition that Greece accept tight surveillance of its administration. The total value of the package of loans and guarantees to Greece could be 237 billion euros.This included cancellation by private banks, insurance companies and hedge funds of debt worth 107 billion euros ($144 billion), or 53.5 percent of Greek debt in private hands and nearly a third of Greek baseline debt totalling about 350 billion euros.The Greek parliament approved the procedure for swapping old debt into new on Friday, just in time for the swap to begin before it was too late.The objective is to give Greece breathing space to make its economy viable and so stay in the eurozone, and to give the eurozone more time to establish a credible firewall, or a fighting fund, to ward off pressures which could arise if Portugal, Spain or Italy get into further trouble over their public finances.The President of the European Commission Jose Manuel Barroso said that the deal closed the door to the chances of a Greek debt default, and the serious economic and social effects that default would have.German Finance Minister Wolfgang Schaeuble, however, has warned that the Greek situation may well emerge again as an issue for the eurozone.Another senior analyst at Moodys, Nondas Nicolaides, noted that the private creditors had accepted a higher haircut or debt cancellation than the 50 percent mentioned initially six months ago, and warned that this was credit negative for Greek banks.He explained: If bondholders agree (individually to the swap), the higher haircut on Greek government bonds will effectively consume the entire capital base of the banking system.This was a reference to heavy holdings of Greek bonds on the balance sheets of Greek banks, already being kept afloat with easy refinancing by the European Central Bank.When these bonds lose further value under the debt swap, on the asset side of the balance sheet, an equivalent amount of value must be removed under auditing rules from the value of shareholders funds on the liability side, thereby reducing sharply the ratio of shareholder funds to risks carried.Moodys commented: The nominal haircut of 53.5 percent will translate into deeper losses for Greek banks, as the net present value loss could be as high as 75 percent, according to preliminary estimates.This was a reference to a calculation of the amount of debt cancelled, loss of future income and its use, as valued in terms of buying power now.The analyst added: This expected loss almost wipes out the Greek banking systems total capital of around 25.2 billion euros reported last September. However, we believe that the overall capital needs for the banking system likely will be much higher, possibly exceeding 40 billion euros.