(Updates with past defaults in sixth paragraph, adds contagion risk in seventh, euro-region support in eighth.)
June 9 (Bloomberg) -- Moody’s Investors Service said it’s “hard to imagine” voluntary investor participation in a Greek debt restructuring and any default would increase the risk of Portugal and Ireland being unable to meet payment obligations.
“It’s hard to imagine something that’s truly voluntary in the current climate,” Bart Oosterveld, managing director in charge of sovereign risk at Moody’s, said at a press conference in Frankfurt today. “The default risks for peripheral European countries continue to increase.”
German Finance Minister Wolfgang Schaeuble said in a June 6 letter that bondholders must contribute a “substantial” share of a second aid package for Greece, proposing a swap to extend maturities that may constitute a default. The German position clashes with the stance of European Commission officials and the European Central Bank, which oppose anything beyond a voluntary rollover of debt as they struggle to avert the euro area’s first sovereign default.
“We are not in favor of restructuring, haircuts and so forth. We exclude all elements which are not voluntary,” ECB President Jean-Claude Trichet said today. “We call for avoiding all credit events and selective defaults.
Moody’s said that there is “no such thing as a default that is both orderly and meaningful,” adding that 50 percent of the countries placed on a credit rating of Caa1 in the past have defaulted. “A default that is large would be very disruptive,” it said.
Greece’s local and foreign currency bond ratings were cut to Caa1 from B1 on June 1 by Moody’s, which cited a growing risk that the country will default on its debt. The outlook on Greek debt is negative, meaning the rating could be reduced further, Moody’s said. The rating is seven steps below investment grade.
Oosterveld said small defaults tend to be followed by further defaults by the same issuer. There have been about 20 sovereign defaults since 1998, limited to emerging markets, with an average loss, or haircut of, about 50 percent, he said.
“The backdrop to address these issues is not favorable -- our base case expectation is that markets will continue to be unsettled about sovereign risks and related banking risk for some time,” he said. Asked about the potential impact of a declared default by Moody’s, he said “markets are volatile.”
Moody’s expects the euro area to continue to provide liquidity support to so-called peripheral European nations, he said. “We think the euro-zone leaders are well incentivized to provide liquidity support and limit contagion,” he said.
--Editors: Alan Crawford, James Hertling
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