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Moody’s downgraded five Greek covered bond transactions today, amid ongoing tensions over private sector involvement in an orderly default that needs to take place by late March.But more interesting than the downgrades is the rating agency’s outlook for Greece, which it says is rapidly deteriorating. While Moody’s says that a Greek exit from the eurozone is still not its base case scenario, the likelihood of this contingency is on the rise:
From the release on the downgrades:
Today’s action reflects Moody’s assessment of the increased probability and severity of a disorderly default by Greece on its debt, and the implications of such a default for Greek covered bonds.
In the event of a disorderly Greek sovereign default, the functioning of the banking system and the state could be materially impaired, and the economy would very likely experience a further sharp contraction. A disorderly default would also increase the likelihood of Greece exiting the euro area, accompanied by a return to a deeply devalued national currency. Whilst such an event is not Moody’s central scenario, the probability of it occurring is rising. In that event, the ability for Greek borrowers to repay their debt would weaken significantly, beyond that already assumed. Even taking into account the low likelihood of this scenario, its effect would be such that Moody’s has concluded that the rating for any Greek covered bond could not be higher than B1.
Greece will face a disorderly default on March 27 if its creditors do not agree to a new deal to extend the maturities of their debt holdings and the country does not receive its next round of EU/IMF/ECB aid.