Monday, 16 January 2012 - 10:43
Moody’s: A larger than 50% haircut would be credit negative for Greek banks
A larger-than-50% haircut on Greek sovereign debt would be credit negative for the country´s banks, and would likely necessitate additional funds for their recapitalization, Moody´s Investors Service said in a report Monday, according to Dow Jones Newswires.
Moody´s Senior Analyst Nondas Nicolaides wrote in the firm´s Weekly Credit Outlook that talks on restructuring Greek debt were likely to resume shortly, despite being suspended last week.
Nicolaides tipped three possible outcomes: agreement on a 50% haircut on Greek debt; a larger haircut of 60% to 70%; or failure to agree, risking a possible Greek default and euro-zone exit.
"Although all three possible outcomes would be credit negative for Greek banks, the last two would be much more severe, requiring additional funds for recapitalizing the banking system," he said, noting widespread speculation that the haircut would be above 50%.
He added that--as agreement on private-sector involvement neared--he expected Greek banks to take further steps to improve their capital levels, with more industry consolidation being "probable."
Moody´s said a 50% haircut was the most manageable outcome. A haircut of 60%-70% would mean a greater level of nationalization for the banks, lasting for a longer period, with the Hellenic Financial Stability Fund needing to inject around EUR24 billion ($30.4 billion) or more in new capital into the system.
In the absence of a private sector involvement agreement, the choice would be to give Greece greater financial assistance or allow a disorderly default, probably setting off a deposit run.
"A disorderly default could also be followed by an exit from the euro area, accompanied by a return to a deeply devalued national currency," Moody´s said.
"In such a situation, which we stress is not our expectation, economic conditions will dramatically deteriorate as domestic consumption collapses, eroding for a sustained period banks´ asset quality, capitalisation and capacity to extend credit."