• Cost of insuring Greek government bonds rises
• Credit rating cut to new low as rescue talks continue
The cost of insuring Greek government bonds rose on Thursday after ratings agency Moody's said there was now a 50% chance of the country defaulting on its debts.
The warning came as Moody's cut Greece's credit rating to Caa1, almost the lowest rating assigned to any country. The move intensified the pressure on European leaders as negotiations over a second rescue package for Greece continued in Vienna.
This "troika review", involving the European Union, the International Monetary Fund and the European Central Bank, is rumoured to be close to agreeing a new £6.4bn deal for Greece.
Moody's justified the downgrade by arguing that Greece will fail to meet the deficit reduction targets that were set as part of its existing bailout deal. The Athens government, though, said Moody's had failed to appreciate the efforts it is taking to bring its debts under control.
"Over five-year investment horizons, around 50% of Caa1-rated sovereigns, non-financial corporate and financial institutions have consistently met their debt-service requirements," Moody's said. "Around 50% have defaulted."
It now costs €1.455m to insure €10m of Greek debt until 2016, after traders pushed the five-year Greek credit default swap (CDS) contract up by 25 basis points to 1455, according to data from Markit. In contrast, the Spanish CDS was trading at 252bp.
"The downgrade … adds to negative sentiment ahead of the troika review results, which are expected before the weekend," said Gavan Nolan, director of credit research at Markit. "A bailout is expected to follow by the end of the month. ECB and EC officials still appear to be at odds over the issue of rescheduling debt, though there are signs that the ECB is becoming more flexible."
Bloomberg reported that Greece has "entered the debt rating hall of shame", with only Ecuador sporting a worse rating.
Nolan added that the prices of Greek debt already imply that the country's credit rating is even lower, at CCC.
There was encouragement, though, that the Vienna talks might achieve a breakthrough soon. According to Reuters, Greece has agreed new austerity measures, including tax rises, in return for the £6.4bn package of aid. This "medium-term fiscal plan" could be presented by Greek prime minister George Papandreou on Friday.
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Source: http://www.guardian.co.uk/business/2011/jun/02/greece-50percent-chance-default
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