Greece will not be allowed to wreck the euro

Moody's Investors Service triggered the latest slide in the fortunes of Greece when, on Thursday, it lowered the sovereign rating by one notch to 'A3' and left the rating on review for further possible downgrade, on Thursday.

Moody's move follows that of Fitch Ratings two weeks earlier. However, the rating remains well above the 'BBB-/Negative' rating assigned to the sovereign by Fitch.

On the same day CDS spreads for Greece moved out by 165 basis points to hit a new record wide of 650 bps. CDS spreads for Portugal and Spain were also dragged wider by 70 bps and 175 bps respectively, as traders bet on a Greek default and the break-up of the euro.

Just the day before, the IMF had released its latest World Economic Outlook, sending equity markets into another slide with its warning on the dangers of bulging sovereign debt.   

Moody's rating action was based on its view that there is a significant risk that debt may only stabilise at a higher and more costly level than previously estimated. The 'P-1' short term rating for Greece is also being reviewed.

Moody's said it is unlikely that the rating will remain at A3, unless the government's actions can restore confidence in the markets and counteract the prevailing headwinds of high interest rates and low growth that could ultimately undermine the government's ability to sustainably cut debt levels.

On Friday, Greece formally requested aid from the European Union and International Monetary Fund. CDS spreads on Greek sovereign debt initially rallied by 70 bps to 550 bps but finished the day at 600 bps, after the market formed the view that delivery of the bail-out will be less than straightforward and that a debt restructure was likely. Such a move would trigger CDS.

Portugal and Spain saw their CDS spreads come under pressure again as fears of contagion grew and Ireland also came under pressure, widening by 21 bps to 172 bps.

Negotiations with the EU and IMF on the Greek bail-out were carried on over the weekend with the Greek finance minister, George Papaconstantinou, stating on Sunday that he was confident that the negotiations would be successfully concluded soon. He went on to say there will categorically be no debt restructuring and those betting on a Greek default will lose their shirts. He also said that Greece would not abandon the euro.

The IMF managing director, Dominique Strauss-Kahn, said he was impressed with the Greek authorities' determination to take action and he expected negotiations would be concluded in time to address Greece's financial needs.

Greece has a May 19 deadline with the next major tranche of debt coming due at that time.

However, concerns grew over the weekend that the €30 billion of funding to be provided by the EU and the €15 billion to be provided by the IMF will not be enough to rescue Greece, with speculation that the amount required could be as high as €80 billion to €90 billion. However, the French finance minister said that the EU and IMF would be delivering a three-year package and the amounts discussed so far are only for the first year.

The German finance minister said Germany does not want the euro wrecked by Greece and that it will be seeking the enforcement of tougher rules on economic stability for all member states.