Greece is helplessly defaulting

Published on Tuesday, 26 July 2011 22:29

Alex

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In a rather dramatic turn of events, the one thing that the EU wanted to avoid has happened and the matter is now out of the EU’s hands. The nation of Greece has fallen into what is called a virtual default. This comes right on the heels of the EU Brussels summit in which all the EU nations pledged to provide for a second bailout package to Greece.

Moody’s Investors’ ratings today cut down Greek debt ratings by three steps to be placed in the second but last Ca category. This is the least rating given to any country covered by Moody’s in the world. Moody’s implied in their report that the eurozone nation would fail substantially to meet its creditors’ demands, hence amounting to a default. This would be first ever default in the eurozone’s history.

Earlier in the week Fitch ratings had signalled that the latest bailout plan would trigger a ‘restricted’ default, as private investors in the country would be taking a 21 percent loss as a result of the rescue package. The deal consisted of banks, private bondholders and the IMF collectively sharing the costs of the rescue package, which totalled to around 109 billion euros. Banks and the other private investors would contribute around 50 billion while the rest would be provided for by governments and the IMF.

Regarding this downgrade Moody’s clarified saying that, “The support package incorporates the participation of private sector holders (banks and other private stakeholders) of Greek debt, who are now virtually certain to incur credit losses. If and when the debt exchanges occur, Moody’s would define this as a default by the Greek government on its public debt.”

It also stated that there is a virtual 100% certainty of default on Greek government bonds. Moody’s also forewarned that the government debt will be more than its GDP for a number of years to come and that Greece faces a tough road on the way to fiscal and monetary reform.

The effect of these announcements was less pronounced on Greek bank shares and the countries stock markets, as this comes after the assurances given by the EU deal. The banks which will be participating in the bailout plunged sharply though. UK banks Barclays, RBS and Lloyd’s all posted losses over 2%. The euro obviously was very sensitive to the news and struggled to continue its last week’s rally against the dollar. The only entity to come out of this mess shining brightly was the Swiss franc; which thanks to its ‘safe haven’ status ascended on the downgrade.