Greek covered bonds downgraded to preempt eurozone exit

As the likelihood of Greece undergoing a disorderly default and exiting the eurozone increases, rating agency Moody’s has cut the rating of Greek covered bonds.

Moody’s has downgraded covered bonds issued by Alpha Bank to B1 from BA3, EFG Eurobank Ergasias to B1 from BA3 and the National Bank of Greece to B1 from BA3.

According to Moody’s, these downgrades reflect “the increased probability and severity of a disorderly default by Greece on its debt, and the implications of such a default for Greek covered bonds. “

If Greece undergoes a disorderly sovereign default, the functioning of its banking system and the state could be impaired and the economy would likely experience a further sharp contraction, the agency said.

“A disorderly default would also increase the likelihood of Greece exiting the euro area, accompanied by a return to a deeply devalued national currency. Whilst such an event is not Moody’s central scenario, the probability of it occurring is rising,” it added.

Moody’s has therefore concluded the rating for any Greek covered bond could not be higher than B1.

“In the remote event of a redenomination in Greece, it is possible the underlying assets backing the notes may be converted into a new national currency while the rated notes would still be denominated in euro.

“In this scenario, and for a given asset performance level, notes will suffer different levels of losses arising from the redenomination risk, depending on the credit enhancement levels,” it explained.

Moody’s decision that Greece is more likely to default in a disorderly fashion echoes comments made by Edward Parker, managing director for rival agency Fitch’s Sovereign and Supranational Group in Europe, the Middle East and Africa last week.

“Greece is insolvent so it will default,” Parker said at a conference in Stockholm.

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