Monday, June 14, 2010

Up, Up and Away?

Greece was downgraded this afternoon by Moody's to a rating Ba1. This new rating is considered "junk" by their rating system. At the end of April, Standard and Poor's downgraded Greece to "junk" status, from a rating for BBB- to BB+. It appeared Moody's was a bit late to the party in terms of downgrading Greece's debt to "junk" status, but never the less, a lower rating arrived. The graph below depicts CDS spreads over the past couple months. As you can see, the downgrading of Greece has had significant impacts CDS rates. For instance, in subsequent days following Fitch's initial downgrades, CDS rates exploded. The same followed when Moody's downgrade was implemented at the end of April.

Looking at today's downgrade to junk status, CDS rates shot up from 733 bps, which was Friday's close, to about 800 bps. What will the longer-term impact be? Is Greece's debt really in danger of defaulting, or will another Eurozone bailout be needed save the ailing country? The dotted purple line gives a possible projection of rates based on past performance after a downgrade.


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