Why Moody’s May Not Have Cut Greece Enough

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Moody’s downgraded Greece’s government bond ratings to B1 from Ba1 and said its outlook for the sovereign paper was “negative.”  The drop was three notches, an unusual move for a credit rating agency industry where cuts of one level are more common. Moody’s may believe that it had been late to signal problems in the sovereign debt market, so a steep cut may help counter those accusations.

Moody’s gave its usual reasons for lowering sovereign ratings for troubled EU nations. Greece’s restructuring plans are too “ambitious.” The Greeks are inexperienced and not aggressive collecting taxes. Existing debt may need to be restructured. In the case of Greece, much of its paper comes due in 2013. The results could be that creditors will get cents on a dollar even though they will enjoy high yields between now and then.

Moody’s was mute on two other critical factors which will affect Greece and it is unusual that they were not part of the headlines in the ratings agency’s announcement of the downgrade. Greece faces just as much risk from high fuel prices and civil unrest as from tax collections.

Greece is a large net importer of oil. Its population and industry consume 440,000 barrels a day. Greece imports 521,000 barrels a day. Those numbers are staggering for a relatively small economy. The very modest GDP recovery forecast in Greece over the next three years could be ruined by a long period of $100 oil.

Moody’s also said little about civil unrest in Greece. It may be because the election of a new regime. The new majority will probably act as Ireland’s has and vote out the government. One of the requests of a Greek government just put into power by voters would be a change in the terms of IMF and EU loans. The reaction of Germany, France, and the IMF may be to turn down any request. That would ruin Greece’s ability to present its sovereign paper as a reasonable risk for international capital markets investors.

Gas prices and civil unrest have quickly replaced worries about austerity plans and tax collection as the troubles that will scuttle the new debt structures of weak countries. Austerity can be managed at least to some extent. The price of crude cannot.

Douglas A. McIntyre

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