Moody’s Investors Service downgraded Greece’s government bond ratings to A2 from A1 on Tuesday, noting a negative outlook for the nation unless the government can follow through on its plan by increasing tax revenues and/or reining in expenditure.
The rating does not affect ratings of Greece’s country ceilings for bonds and bank deposits, which remain at Aaa, the service said.
Greece's repositioned rating of A2 balances the Greek government's very limited short-term liquidity risks on the one hand, and its medium- to long-term solvency risks on the other, said Sarah Carlson, Moody's lead sovereign analyst for Greece, in a released statement.
The move comes after Moody’s reviewed Greece’s A1 sovereign rating amid “mounting evidence that the government’s long-term credit rating strength was eroding materially,” the service noted.
Moody's believes that Greece is extremely unlikely to face short-term liquidity/refinancing problems unless the European Central Bank decides to take the unusual step of making the sovereign debt of a member state ineligible as collateral for bank repurchase operations -- a risk that we consider very remote, said Arnaud Marès, Senior Vice President in Moody's Sovereign Risk Group.
The Greek government's credit challenges are of a longer-term nature, said Carlson. They stem from a slow erosion in competitiveness and economic potential, which implies that the government's debt problem cannot be resolved by growth alone. They also result from chronically weak fiscal institutions, which cast a shadow over the government's ability to implement decisive fiscal retrenchment in order to restore debt sustainability.
The A2 rating for Greece compares with those of “other high-income but highly indebted countries that do not face external payment vulnerabilities,” Moody’s said.
Greece’s rating is positioned “well below” Belgium, Ireland or Italy, which have ratings between Aa1 and Aa2. Greece’s rating is higher than Mexico, Brazil or Hungary, which have a Baa rating. Those countries have similar debt metrics but much lower income levels, the report notes.