MacroScope

Moody’s turns Delphic on Greek debt

December 23, 2009
Ratings agency Moody’s decision to downgrade Greek sovereign debt by less than many investors had feared relies partly on a self-fulfilling prophecy.

In downgrading the debt to A2, Moody’s ensured that Greek (and other) banks will still be able to swap Greek bonds for cheap funding from the European Central Bank, assuming that nothing has changed by this time next year when the ECB will only accept bonds rated A-/A3 or above as collateral by at least one agency.

Both Standard & Poor’s and Fitch have cut Greek bonds to BBB-plus this month, meaning if Moody’s cuts Greece to an equivalent level, Greek banks are likely to face difficulties in getting access to liquidity as analysts estimate more than half the collateral they have submitted at the central bank is in government bonds.

Yet Moody’s explained the decision as partly due to its expectation that the ECB will keep accepting Greek debt as collateral, a decision which hinges on Moody’s itself keeping Greece’s rating above the watermark. 

Unless of course the ECB backflips and lowers its standards before December 2010, although ECB Vice-President Lucas Papademos has said the euro zone central bank will not bend the rules for Greece.

Greek bond yields have soared compared to the euro zone benchmark and the cost of insuring against default has risen as the country struggles to get its finances in order.

Greek bond yields have soared compared to the euro zone benchmark and the cost of insuring against default has risen as the country struggles to get its finances in order.

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In the short term the Greek government requires fiscal reforms in the form of a new and rigorous taxation regime to ensure the correct flow of consolidated revenues into the government coffers. This must be done in a manner which doesn’t disadvantage the most vulnerable in society. These reforms must be coupled with transparency in all government dealings which the Papandreou government has already initiated. Additionally, in the long run Greece needs to increase its population with skilled migrants who can fortify the taxation base of the country and increase the entrepereurial opportunities for the country. In short, Greece needs somewhat of an economic miracle or the implementation of new technological processes to free it from its current economic quagmire.

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