CREDIT RATING agency Moody’s has warned that Ireland could be pushed further into financial turmoil if Greece restructures its debt, saying bailout recipients could have debt downgraded to “junk” status if Athens defaults.
Amid renewed market attention on Spain and anxiety about new credit downgrades of Italy and Belgium, Moody’s made it clear yesterday that a Greek default would be “highly destabilising” and would have implications for the creditworthiness of bond issuers across Europe.
Alastair Wilson, Moody’s chief credit officer in Europe, said such an action would “potentially” result in Ireland and Portugal receiving a “junk” rating.
“If there were to be a Greek default there could potentially be multi-notch downgrades to the weakest sovereigns.”
Any junk rating on Irish sovereign debt would severely compromise the Government’s effort to regain entry into private debt markets.
Moody’s and rival agencies Fitch and Standard Poor’s have each declared that they would probably view a “soft” debt restructuring by Greece – in which investors were offered a deal but were not compelled to accept it – to be a default. SP has said it would define as a default anything that would have a negative impact on the net present value of a bond. Fitch Ratings has said it would consider “an extension of the maturity of existing bonds” to be a default event.
However, euro zone finance ministers continue to examine how Greek creditors might be invited to reschedule the repayment of their debt voluntarily.
Although some ministers believe investors such as Greek banks would have an incentive to accept a loosening of their debt terms, the European Central Bank (ECB) has relentlessly warned of potentially catastrophic consequences from such an action.
European Council president Herman Van Rompuy joined the clamour against restructuring yesterday when he said the emphasis must be on the execution of tough fiscal reforms by Greece.
“There is a real danger that one form or another of debt restructuring or rescheduling aggravates the situation, since the risks of failure of such operations are huge compared to the potential benefits. We have clear red lines: avoiding a default and avoiding a credit event.”
The ECB reiterated its concerns yesterday, a stance which reflects acute fear of renewed contagion in markets after almost 18 months of near-constant crisis. “A restructuring is a horror scenario,” said Christian Noyer, chief of the Banque de France and a member of the ECB governing council. “Greece must apply its [rescue] programme entirely and completely . . . there is no alternative.”
Greek finance minister George Papaconstantinou said Greece would not be able to honour its obligations if it did not obtain the next round of bailout loans next month.
While the European Commission has welcomed a new fiscal plan from Athens, Greece’s sponsors are awaiting the outcome of a bailout troika review before deciding whether to release the money.
As the country’s economic outlook worsens due to its huge debt, it has little prospect of returning to bond markets next year as foreseen in its rescue plan. An alternative to an easing of its loan terms is a new loan package, something EU leaders are reluctant to grant.
