3 JUN 2011
By John Fraher | Bloomberg
Greece’s risk of default was raised to 50 percent by Moody’s Investors Service as European officials rushed to put together the second bailout plan in two years to stave off renewed financial turmoil in the region.
Moody’s downgraded Greece to Caa1 from B1, putting it on a par with Cuba, according to a report published late yesterday. The move came after policy makers considered asking investors to reinvest in new Greek debt when existing bonds mature.
Twelve years after the currency was started, European leaders are trying to prevent the euro area’s first sovereign default. A 110 billion-euro ($158 billion) rescue in 2010 failed to prevent an investor exodus from Greece, and the country now faces a funding gap of 30 billion euros of bonds next year with its 10-year borrowing cost above 16 percent.
“Taken together, these risks imply at least an even chance of default over the rating horizon,” Moody’s said in a statement. “Over five-year investment horizons, around 50 percent of Caa1-rated sovereigns, non-financial corporate and financial institutions have consistently met their debt-service requirements. Around 50 percent have defaulted.”
Vincent Truglia, managing director of global economic research for Granite Springs Asset Management LLC in New York, says the Caa1 rating “causes problems for certain investors” that are not allowed to hold such low-rated debt. Truglia, a former head of Moody’s sovereign risk unit, said the ratings move could affect the way investors view large European banks that hold Greek debt.
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Greek default could bankrupt ECB