MOODY’S delivered a jolt to Eurozone bond markets yesterday by downgrading Greece three notches to B1 – a lower rating than Egypt – and assigning the sovereign a “negative” outlook.
The yield on Greece’s three-year debt reached highs not seen since the government had to be bailed out last May, spiking to 16.8 per cent, while Greek five-year credit default swaps jumped yesterday to a high of 1,005 basis points, meaning that it cost €1m to insure €10m of Greek debt.
The ratings agency said its decision was driven by problems with tax collection and the overly ambitious targets Greece needs to meet to stabilise its debts and meet the conditions of its €110bn bailout.
The setback for Greece came despite the government’s progress on its deficit, which it cut by six per cent of GDP last year. The agency said the magnitude of the task facing the sovereign is simply too great. “The task facing officials and managers remains enormous,” said Moody’s, citing “large implementation risks” as a major concern. It added that ongoing Eurozone negotiations about sovereign bonds after 2013 have created uncertain investment conditions. If Greece fails to meet its bailout requirements, Moody’s says: “There is some possibility that private creditors would be expected to bear some losses.”