Greek bailout could worsen EU debt crisis, warns Moody's

The Greek bailout has increased, rather than decreased, the danger that Europe's debt crisis could spread to Spain and Italy, Moody's warned yesterday as it significantly cut Greece's credit rating and said a default appeared inevitable.

Although the credit ratings agency stopped short of naming Spain and Italy, Moody's was referring to them when it said that for some "non-Aaa sovereigns with high debt burdens or large budget deficits... the negatives will far outweigh the positives and weigh on ratings in the future".

Moody's said that by agreeing to write down the value of their Greek government bonds by 21 per cent, as part of last week's bailout, a precedent had been set that left investors open to further "haircuts" on the sovereign debt of other countries, in the likely event that one or more of Europe's other struggling countries will need additional rescue packages.

The agency's warning came amid mounting concerns about US Treasuries that could potentially eclipse the European debt crisis. Treasury 30-year yields continued to edge up as Republicans and Democrats failed to reach a deal to increase America's debt ceiling, which the world's biggest economy needs if it is to avoid default.

Gary Jenkins, the head of fixed income at Evolution Securities, said: "Moody's is clearly talking about Spain and Italy, and this is hugely significant. The whole idea of last week's bailout was to try to stop the contagion. But in reality the debt problems are now more likely to get worse than better in the medium term.

"If Spain and Italy get downgraded, it will accelerate the loss of confidence in those countries, there will be a sell-off of bonds and its bond yields will rise, meaning it is more expensive to borrow," Mr Jenkins added.

David Buik, of broker BGC Partners, said: "It's already very difficult to sell five-year and 10-year Spanish and Italian bonds and if they come under even more duress it will be absolutely impossible."

Moody's expects that, in the case of previous bailout recipients Ireland and Portugal, last week's developments will be "credit neutral", since the deal with Greece will also see them paying less interest on their bailout borrowings.

This offsets the dangers posed by the "haircut precedent", Moody's said. The agency also expects the ratings of the six Aaa-rated eurozone countries such as Germany and Austria to be unaffected by the Greek deal.

However, those countries that are highly indebted, but which haven't had any of their borrowing costs reduced as part of the Greek deal, are now more likely to see their ratings reduced, Moody's said. Moody's cut Greece's debt rating to Ca on Monday, putting it just one notch below default.

"The EU programme implies that the probability of a distressed exchange, and hence a default, on Greek bonds is virtually 100 per cent. [Greece's] debt will still be in excess of 100 per cent of GDP for many years and it will still face very significant implementation risks to fiscal and economic reform," the agency said.

The €159bn (£140bn) financing package will see Europe and the International Monetary Fund providing €109bn, while investors will contribute €50bn through a debt exchange that will see them writing down the value of their bonds by 21 per cent.

Mounting concerns about worsening debt problems in Spain and Italy pushed up the price of their governments' bonds. The 10-year yield spread between low-risk German Bunds and high-risk Italian government debt increased by 20 basis points to 280.

Investor boost for Ireland

* Ireland sold a €1.1bn ($1.6bn) stake in Bank of Ireland to a group of unidentified investors to keep the country's largest bank out of state hands and provide a rare boost to a battered sector and bruised economy.

The government had been widely expected to take control of Bank of Ireland, the last domestic lender outside of state ownership, after it agreed to underwrite a rights issue, the results of which are due this morning.

However, after the sale and rights issue, the government will now own a maximum 32 per cent in the bank while new investors will hold between 14 and 37 per cent, the finance ministry said.

"It has been recited far and wide that it is impossible for Ireland to get money on the markets," the country's finance minister, Michael Noonan, said.

"Now we have significant private sector investors prepared to put money into Bank of Ireland and that's a strong signal internationally."

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Graduate Recruitment Resourcer

£20000 per annum + commission: SThree: Sthree have an exciting opportunity for...

Recruitment Genius: Telesales Executive - OTE £32,000+

£18000 - £32000 per annum: Recruitment Genius: A Telesales Executive is requir...

Ashdown Group: Marketing Manager - B2B, Corporate - City, London

£45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, glo...

Neil Pavier: Commercial Analyst

£50,000 - £55,000: Neil Pavier: Are you a professionally qualified commercial ...

Day In a Page

General Election 2015: The masterminds behind the scenes

The masterminds behind the election

How do you get your party leader to embrace a message and then stick to it? By employing these people
Machine Gun America: The amusement park where teenagers go to shoot a huge range of automatic weapons

Machine Gun America

The amusement park where teenagers go to shoot a huge range of automatic weapons
The ethics of pet food: Why are we are so selective in how we show animals our love?

The ethics of pet food

Why are we are so selective in how we show animals our love?
How Tansy Davies turned 9/11 into her opera 'Between Worlds'

How a composer turned 9/11 into her opera 'Between Worlds'

Tansy Davies makes her operatic debut with a work about the attack on the Twin Towers. Despite the topic, she says it is a life-affirming piece
11 best bedside tables

11 best bedside tables

It could be the first thing you see in the morning, so make it work for you. We find night stands, tables and cabinets to wake up to
Italy vs England player ratings: Did Andros Townsend's goal see him beat Harry Kane and Wayne Rooney to top marks?

Italy vs England player ratings

Did Townsend's goal see him beat Kane and Rooney to top marks?
Danny Higginbotham: An underdog's tale of making the most of it

An underdog's tale of making the most of it

Danny Higginbotham on being let go by Manchester United, annoying Gordon Strachan, utilising his talents to the full at Stoke and plunging into the world of analysis
Audley Harrison's abusers forget the debt he's due, but Errol Christie will always remember what he owes the police

Steve Bunce: Inside Boxing

Audley Harrison's abusers forget the debt he's due, but Errol Christie will always remember what he owes the police
No postcode? No vote

Floating voters

How living on a houseboat meant I didn't officially 'exist'
Louis Theroux's affable Englishman routine begins to wear thin

By Reason of Insanity

Louis Theroux's affable Englishman routine begins to wear thin
Power dressing is back – but no shoulderpads!

Power dressing is back

But banish all thoughts of Eighties shoulderpads
Spanish stone-age cave paintings 'under threat' after being re-opened to the public

Spanish stone-age cave paintings in Altamira 'under threat'

Caves were re-opened to the public
'I was the bookies’ favourite to be first to leave the Cabinet'

Vince Cable interview

'I was the bookies’ favourite to be first to leave the Cabinet'
Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat