Moody’s Investors Service has lowered its assessment of the highest rating that can be assigned to a domestic debt issuer in Greece to Caa2 based on the increasing risk of an exit by the country from the euro area. The highest rating on any Greek security is currently B1, which is rating assigned to certain covered bonds. Any rating actions taken as a result of the new ceiling will be released during the coming week.
Moody’s indicated that although the risk of a euro exit by Greece is substantial it is still not what it considers its “central case” or most likely scenario. Following the June 17 Greek parliamentary elections, it is possible that the risk of euro exit will increase further. If that were to occur, the maximum rating Moody’s would assign to Greek securities would fall further.
An exit would result in large losses to investors due to redenomination of government debt and private debt securities issued under Greek law and lead to severe disruption to the country’s banking system and acute dislocations in the real economy. That disruption would generally imply additional losses for holders of debt securities issued by Greek entities, irrespective of their governing law.
Moody’s also notes that there is a potential for exceptions whereby a security could be rated higher than Caa2 if the “Greek” issuer is essentially a non-domestic company, has substantial assets outside the country or receives substantial support from an entity outside the country.
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