Greek collateral deals may delay bailout, warns Moody's

Published 23 August 2011

Eurozone nations trying to persuade Greece to cough up cash collateral in return for aid risk delaying the debt-mired state's next bailout payment and driving it into default, rating agency Moody's said yesterday (22 August).

Greece clinched a new rescue package at a eurozone leaders' summit in July, covering its borrowing needs up to mid-2014.

In a bilateral deal, it then agreed to provide Finland with collateral in exchange for loans, sparking similar requests last week from Austria, the Netherlands and Slovakia.

But rating agency Moody's said on Monday a proliferation of such deals to furnish cash collateral would be credit-negative for Greece, which is currently rated Ca, just one notch above default, by the agency.

"The agreement between Greece and Finland, which is small by itself, assumes much greater significance. The pursuit of such agreements could delay the next tranche of financial support for Greece and so precipitate a payment default," it said.

Proliferation of collateral agreements

Austria, the Netherlands and Slovakia said on Friday they wanted collateral on their loans to Greece after Finland secured Athens' commitment to do so, but Greek officials have said they were not talking to countries other than Finland about such a plan.

Moody's said a proliferation of collateral agreements would also limit the availability of funds for future bailout programmes, and that for these reasons it expected other euro area members ultimately to reject the Finland-Greece deal.

Greece is set to receive the next €8 billion tranche from its first bailout package in September. Analysts said all eurozone states need to concur on aid disbursement for Greece, and any requests for collateral might cause delays as Athens faces fixed needs to redeem bonds and plug fiscal holes.

"One thing leads to another and then you can end up with difficulties in implementing the bailout deal. Perhaps it was wrong to have this agreement with Finland," said one Greek economist who declined to be named.

Greece, whose debt market activity is restricted to monthly short-term debt auctions, needs to roll over €4 billion of three- and six-month Treasury bills next month.

Moody's said seeking collateral showed a lack of will in some eurozone countries and put more pressure on Germany and France to take stronger steps to support the euro project.

"The deep fissures among the ostensibly united euro area nations evidenced by such demands, even in the context of new German and French proposals intended to strengthen European institutions, create additional concerns over the conditional and evolving nature of the current financial support mechanism," Moody's said.

It said a proliferation of collateral agreements would also limit the availability of funds for future bailout programmes. 

Background:

In late July 2011, eurozone leaders put together a second bailout for Greece to supplement a €110 billion rescue plan launched in May last year.

It is expected to include fresh emergency loans to Athens from eurozone governments and the International Monetary Fund, and possibly a range of other measures.

Worried about the impact on financial markets and wary of angering their own taxpayers, eurozone governments struggled for several weeks to agree on major aspects of the plan, especially a contribution by private sector investors.

In many months of haggling with the EU's banks, the private sector has agreed to take a hit on its holdings of Greek sovereign debt. Between 2011 and 2019, the private sector's total contribution to a Greek rescue could amount to €106 billion, according to conclusions from the July summit.

The second deal also saw disgruntled countries like Finland seek guarantees in return for their contribution to the Greek bailout. Finnish and Greek officials subsequently struck a deal whereby Greece would provide cash in return for the commitment of Finnish taxpayers to the bailout. 

EurActiv with Reuters

Greek collateral deals may delay bailout, warns Moody's | EurActiv