PARIS (MNI) – Moody’s Investors Service today put Greece’s local
government and foreign currency-denominated bonds on watch for a
possible downgrade, despite the country’s “significant progress in
implementing a very large fiscal consolidation effort.”

Moody’s said the difficulty for Greece of reducing its debt to more
sustainable levels has grown both because of developments at home and in
the broader European region.

The rating agency said a multi-notch downgrade “would be possible”
if the risk rises that Greece will be unable to stabilize its
debt-to-GDP ratio in the next three to five years.

A verbatim text of the Moody’s statement is below:

London, 16 December 2010 — Moody’s Investors Service has today
placed Greece’s Ba1 local and foreign currency government bond ratings
on review for possible downgrade. Greece’s country ceilings for bonds
and bank deposits are unaffected by the review and remain at Aaa (in
line with the Eurozone’s rating).

Moody’s decision to initiate this review was prompted, despite
significant progress in implementing a very large fiscal consolidation
effort, by the increased uncertainty over (1) Greece’s ability to reduce
its debt to sustainable levels given the recent substantial upward
revision in debt levels; (2) the substantial revenue shortfall that we
have observed in 2010; and (3) the level and conditions of ongoing
support that would be available to Greece in the event that its market
access remains cut off. Therefore, Moody’s review will focus on the
factors, namely nominal growth and fiscal consolidation, that will drive
the country’s debt dynamics over the next few years. It will also
consider implementation risk, which appears to be particularly high in
2011 for both political and administrative reasons.

Moody’s says that a multi-notch downgrade would be possible if it
concludes that there is an increased risk that Greece’s debt-to-GDP
ratio will fail to stabilize in the next three to five years, or that
there is a greater risk that EU support will turn out to be less strong
after 2013 than the rating agency had previously assumed.

RATIONALE FOR REVIEW

“Greece has made significant progress in implementing a very large
fiscal consolidation effort. However, the challenge of reducing debt to
sustainable levels has also become greater due to both domestic and
regional developments,” says Sarah Carlson, Vice President-Senior
Analyst at Moody’s Investors Service and lead sovereign analyst for
Greece.

These developments include:

1.) Substantial upward revision in debt levels: Greek debt was
already at a high level before Eurostat’s recent revision of Greece’s
2009 debt statistics to 126.8% of GDP. This 11.7 percentage point
revision is almost twice the level that Moody’s had anticipated and
amplifies the risks stemming from the country’s uncertain growth and
interest rate outlook over the coming years.

2.) Weak revenue growth: Greece has fallen well short of its
revenue growth targets in 2009, a factor that contributed to the upward
revision in its deficit projections for 2010. Although there are signs
that VAT collections are improving in spite of the weak macroeconomic
climate, the vigorous implementation of reforms to fight tax evasion
will be critical to a sustainable improvement in public finances.

3.) Uncertainty surrounding ongoing support: The level and
conditions of ongoing support on offer to Greece is no longer certain.
The IMF and European authorities have expressed very strong support for
Greece, as long as Greece follows through with its economic programme.
However, the authorities’ willingness and ability to provide Greece with
additional assistance is not assured and particularly depends on
programme implementation. Moreover, the precise nature and conditions of
support that will be forthcoming after 2013 — and the implications that
this will have for bondholders — is unclear.

Moody’s recognises the impressive progress that the government has
made in implementing the fiscal consolidation programme so far. The
reduction of the fiscal deficit by around 6 percentage points and the
passage of landmark pension and labour-market reform are noteworthy
achievements.

“However, the substantial upward revision of debt levels, weak
revenue growth and lack of certainty surrounding long-term support, if
required, are negative factors that outweigh the many positive
developments that Moody’s has observed in Greece since it accepted the
Eurozone/IMF assistance package in May 2010,” says Ms. Carlson.

FACTORS TO BE CONSIDERED IN THE REVIEW

Firstly, Moody’s rating review will focus on Greece’s ability to
reduce debt to sustainable levels in a challenging economic and
political environment. This will be affected by two variables: nominal
growth and fiscal consolidation. Therefore, a key element of this review
is Greece’s 2012-2014 plan for fiscal consolidation and economic reform.
The Eurozone/IMF programme that was adopted in May 2010 encourages the
implementation of a credible, feasible and incentive-compatible set of
structural reforms. However, the programme has relatively few details
about the policy agenda for 2012-2014. The revision of debt statistics
has raised the bar for what these future reforms need to accomplish. “In
order for Greece to achieve large primary surpluses over a sustained
period of time, further structural fiscal adjustments will be required,”
says Ms. Carlson.

Moreover, the Greek government’s ability to speed up the
implementation of the fiscal and structural reform programme will also
be a factor in Moody’s review. “The government is clearly very
determined to push the adjustment process forward, but it is facing
significant political and administrative headwinds,” says Ms. Carlson.
Implementation risk is particularly high in 2011, and during the review
Moody’s will be looking at how those risks are being addressed.

The external environment in which Greece has been operating has
clearly deteriorated, which has had an adverse impact on its
creditworthiness. Although support from the Eurozone has been very
strong up until now, Moody’s believes that changing market conditions
imply that there are realistic limitations to any such support.
Moreover, the nature of this support after the European Financial
Stability Facility (EFSF, rated Aaa) winds down in June 2013 is unclear.
“Uncertainty surrounding plans for burden-sharing with investors in the
event of a crisis are likely to negatively affect market access and
funding costs for Greece,” says Ms. Carlson.

PREVIOUS RATING ACTIONS AND METHODOLOGIES

Moody’s last rating action affecting Greece was implemented on 14
June 2010, when the rating agency downgraded Greece’s government bond
ratings to Ba1 and assigned a stable outlook. Prior to that, Moody’s
last rating action on Greece was taken on 22 April 2010, when the rating
agency downgraded Greece’s government bond ratings to A3 and placed the
rating on review for further possible downgrade.

The principal methodology used in rating the Government of Greece
is “Moody’s Sovereign Bond Methodology” published in September 2008,
which can be found at www.moodys.com. Other methodologies and factors
that may have been considered in the process of rating this issuer can
also be found on Moody’s website.

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