Default still stalking Greece, says Moody?s

Greece will still be at high risk of defaulting despite the agreement last week on a rescue and part cancellation of its debt, credit rating agency Moody?s said on Monday.

The agency also warned that the terms of the debt swap could result in a severe further weakening of the capital base of the Greek banking system.

Moody?s Investors Service said that ?the 21 February announcement on support for Greece is an important step forward, but the risk of a default even after this distressed exchange [of bonds] is completed remains high.?

The agency?s senior analyst Sarah Carlson said in Moody?s weekly review of worldwide events affecting credit markets that ?Greece?s debt burden will remain large for many years, and the country is unlikely to be able to access the private market after the second assistance package runs out.?

Carlson continued: ?The outcome of elections, expected in April, also constitutes a source of political and implementation risk.?

She said that in the coming days, Moody?s would comment further on the implications of the agreement completed on February 21.

Another senior analyst at Moody?s, Nondas Nicolaides, noted that the private creditors had accepted a higher ?haircut? or debt cancellation than the 50 percent mentioned initially six months ago, and warned that this was ?credit negative for Greek banks.?

He explained, ?If bondholders agree [individually to the swap], the higher haircut on Greek government bonds will effectively consume the entire capital base of the banking system.?

This was a reference to heavy holdings of Greek bonds on the balance sheets of Greek banks, already being kept afloat with easy refinancing by the European Central Bank.

Moody?s commented, ?The nominal haircut of 53.5 percent will translate into deeper losses for Greek banks, as the net present value loss could be as high as 75 percent, according to preliminary estimates.?

The analyst added: ?This expected loss almost wipes out the Greek banking system?s total capital of around 25.2 billion euros reported last September. However, we believe that the overall capital needs for the banking system likely will be much higher, possibly exceeding 40 billion euros.?