The following text is a statement by Moody's Thursday downgrading Greece capital Athens to 'Caa1' with a negative outlook:
Moody's Investors Service has today downgraded the City of Athens' issuer rating to Caa1 from B1 and changed the outlook to negative. Today's rating action concludes the review for downgrade initiated on 10 May 2011.
RATINGS RATIONALE
Today's rating action on Athens follows Moody's decision to downgrade the sovereign rating of Greece to Caa1, with a negative outlook.
The Sovereign action reflects the increased risk that Greece will fail to stabilise its debt position as well as the increased likelihood that Greece's supporters (the IMF, ECB and the EU Commission, together known as the "Troika") will, at some point in the future, require the participation of private creditors in a debt restructuring as a precondition for funding support. Taken together, these risks imply at least an even chance of default over the rating horizon.
"Greek municipalities, including the city of Athens, are unlikely to have enough financial flexibility to enable their credit quality to be stronger than that of the sovereign itself", says Gianfilippo Carboni, Moody's lead analyst for Athens. "We also recognise Athens' reliance on central government transfers in order to fund its operations and capital investments, and the high level of integration of its local economic base with that of the national economy", adds Mr Carboni.
The strong operational and financial linkages between the city and the sovereign imply significant limitations for the city's administration to act independently from the sovereign and outside of the scope of broader government reforms. These linkages are illustrated in the recent deterioration in the city's financial performance, which has mirrored the overall deterioration of the sovereign's fiscal position.
Pre-closing figures for 2010 reveal Athens' difficulty in adjusting expenditure levels to match lower revenue, resulting in a widening cash financing deficit. "We believe that anticipated cuts in central government transfers will be difficult to absorb within the city's budget. Particularly, measures to reduce personnel costs, dictated under government reforms, and to streamline public services will take time to generate savings. In the near term, this will exert greater liquidity pressure on Athens' finances", continues Mr Carboni.
The negative outlook matches that on the Sovereign rating and reflects the strong linkages referred to above. Additionally, the outlook reflects the significant fiscal and liquidity challenges facing the city.
WHAT COULD CHANGE THE RATING UP/DOWN
Given the strong linkages between the sovereign and the City of Athens, Moody's would likely downgrade the city further if the sovereign rating were downgraded. Moody's would downgrade Greece's rating further if it transpired that the Greek government's compliance with the conditions stipulated in the Memorandum of Understanding is materially weakening, and that, as a result, there is a rising risk that additional funding will not be forthcoming. Any announcement of a programme that includes conditions that satisfy Moody's definition of default would also lead to further downgrades. Our expectation is that if the sovereign defaulted, a default by the City would be equally as likely. If this were to occur, any future rating action on the City would be based on a loss-given default analysis to assess the extent of losses to the City's lenders, which could move independently of central government actions.
Conditions that would lead to a sovereign upgrade would also likely lead to an upgrade of the City's rating as these conditions would flow through and impact the City's finances in much the same way as they would impact the sovereign itself. Moody's would upgrade Greece's rating if the pace of fiscal consolidation and/or structural reform implementation were to proceed much more rapidly than Moody's currently expects. An upgrade could also follow if key drivers of the debt dynamics were seen to be evolving in a way that would significantly accelerate the pace of debt reduction.
The principal methodologies used in this rating were "Regional and Local Governments Outside the US", published in May 2008, and "The Application of Joint Default Analysis to Regional and Local Governments", published in December 2008.
As the capital city of Greece, Athens plays a key role as the financial, economic and political hub of the country. It accounts for almost 50% of national GDP and has a total population of 745,000.
