Greek bonds tumble on Moody's rating cut

08:40, December 23, 2009      

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Greece had its credit rating cut one step to A2 by Moody's Investors Service, sparking a rally in its bonds as concern eased that a steeper downgrade would make its debt ineligible as collateral at the European Central Bank (ECB).

"There is some relief that it's only one notch," said Peter Chatwell, a London-based fixed income strategist at Calyon, Credit Agricole SA's investment banking division.

Moody's "talks quite positively about Greece's liquidity situation".

The downgrade puts Greece's rating at A2, five steps above non-investment grade and two higher than the levels assigned to it by Standard & Poor's and Fitch Ratings.

The ranking is the lowest among the 16 euro-member states and the same as that of Poland and Botswana.

Moody's said in a statement the new rating carries a "negative" outlook, meaning it's more inclined to cut it again than leave it unchanged or raise it.

"Greece is extremely unlikely to face short-term liquidity or refinancing problems unless the ECB decides to take the unusual step of making the sovereign debt of a member state ineligible as collateral for bank repurchase operations," Arnaud Mares, a senior vice-president at Moody's in London, said in the statement.

It's a "risk that we consider very remote".

Greek stocks rose, with the benchmark ASE Index climbing as much as 3.5 percent.

The yield on the Greek 10-year bond tumbled as much as 23 basis points, the most since Dec 16, and was 21 basis points lower at 5.74 percent as of 9:42 am in London, from 6 percent yesterday. The yield on the two-year note fell 10 basis points to 3.41 percent.

Spread narrows

The difference in yield between the 10-year note and that of the German bund, Europe's benchmark government security, narrowed 24 basis points to 252 basis points.

It was 184 basis points at the start of this month. Credit-default swaps on Greek government debt dropped 2.5 basis points to 286.5, according to CMA DataVision prices.

Prime Minister George Papandreou's government, which came to power in October promising higher spending and wages, is trying to persuade investors it reduce cut its deficit from 12.7 percent of gross domestic product to below the European Union's 3 percent limit by 2013.

The nation "remains focused" on reducing the deficit and will intensify efforts to bolster the economy, the Greek Finance Ministry said in an e-mailed comment from Athens following the Moody's announcement.

"The government knows what it needs to do, but we'll be looking very closely at implementation," Sarah Carlson, the lead sovereign analyst on Greece at Moody's, said in an interview from London.

"Public acceptance of these measures is absolutely key to the success of stabilizing Greece's situation over the long term."

Further cuts from Moody's would cast doubt on the eligibility of Greek debt at the ECB's money market operations.

Moody's is the only major ratings company grading Greece above BBB+ after cuts from Standard & Poor's and Fitch Ratings earlier this month.

A downgrade of two more notches would mean Greek bonds won't be accepted by the ECB if it reverts to its pre-crisis collateral rules in a year's time.

Negative outlook

The negative outlook "means that over the next 12 to 18 months, there is a more than 50 percent probability that we downgrade them again," Carlson said.

Goldman Sachs Group Inc said last Thursday that the European Central Bank should revise its collateral rules to end what it says is Moody's veto over Greek bond eligibility.

The ECB currently accepts bonds rated BBB- as collateral after relaxing its rules in response to the financial crisis.

Source: China Daily
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