Moody's: EU Support Package Permits Orderly Default by Greece and BuysTime; Mixed Credit Impact for Other Euro Area Sovereigns

London, 25 July 2011 -- The support package for Greece announced after last Thursday's summit benefits all euro area sovereigns by containing the contagion risk that would likely have followed a disorderly payment default on existing Greek debt, says Moody's Investors Service in a new Special Comment published today. However, the credit implications of the announcement for creditors of individual countries depend on the balance of the positive market-stabilising elements of the plan and the negative precedent set by the endorsement of distressed exchanges between Greek creditors and the sovereign.

GREECE: The support package incorporates the participation of private sector holders of Greek debt, who are now virtually certain to incur creditlosses. If and when the debt exchanges occur, Moody's would define this as a default by the Greek government on its public debt. Accordingly, Moody's has today downgraded Greece's debt ratings from Caa1to Ca to reflect the expected loss implied by the proposed debt exchanges. Once the distressed exchange has been completed, Moody's will reassess Greece's rating to ensure that it reflects the risk associated with the country's new credit profile, including the potential for further debt restructurings. While the rating agency believes that the overall package carries a number of benefits for Greece -- a slightly reduced debt trajectory, lower debt-servicing costs, as well as reduced reliance on financial markets for years to come -- the impact on Greece's debt burden is limited.

OTHER EURO AREA SOVEREIGNS: The support package for Greece benefits all euro area sovereigns by containing the severe near-term contagion risk that would likely have followed a disorderly payment default or large haircut on existing Greekdebt. The EFSF will also be given additional powers to extend support to euro area sovereigns and stabilise sovereign bond prices. Ireland and Portugal, which currently receive support from the EuropeanFinancial Stability Mechanism (EFSF), will pay lower interest rates on their borrowings going forward. Set against that, however, despite statements to the contrary, the support package sets a precedent for future restructurings should the finances of another euro area sovereign become as problematic as those of Greece. The impact of Thursday's announcement for creditors of Ireland and Portugal is therefore likely to be credit-neutral. As for creditors of other non-Aaa sovereigns with high debt burdens or large budget deficits, the positive elements of the announcement --including the positive short-term impact on market sentiment, the introduction of tools to help stabilise sovereign debt prices and avoid the disruptive effect of disorderly defaults and, should funding from theEFSF ever be required, the lower interest rate which would be charged --need to be weighed against the negative implications of this precedent-setting package should any country face financing challenges similar in severity to Greece's. On balance, Moody's says that, for creditors of such countries, the negatives will outweigh the positives and weigh on ratings in future.