EU package lets orderly default by Greece and buys time, says Moody’s

The support package for Greece announced after last Thursday's summit benefits all euro area sovereigns by containing the contagion risk that would likely have followed a disorderly payment default on existing Greek debt, Moody's Investors Service said in a special comment on Monday.
However, the credit implications of the announcement for creditors of individual countries depend on the balance of the positive market-stabilising elements of the plan and the negative precedent set by the endorsement of distressed exchanges between Greek creditors and the sovereign.
The support package incorporates the participation of private sector holders of Greek debt, who are now virtually certain to incur credit losses. If and when the debt exchanges occur, Moody's would define this as a default by the Greek government on its public debt.
Accordingly, Moody's has downgraded Greece's debt ratings from Caa1 to Ca to reflect the expected loss implied by the proposed debt exchanges. Once the distressed exchange has been completed, the rating agency said it will reassess Greece's rating to ensure that it reflects the risk associated with the country's new credit profile, including the potential for further debt restructurings.
While Moody’s believes that the overall package carries a number of benefits for Greece — a slightly reduced debt trajectory, lower debt-servicing costs, as well as reduced reliance on financial markets for years to come — the impact on Greece's debt burden is limited.
The support package for Greece benefits all euro area sovereigns by containing the severe near-term contagion risk that would likely have followed a disorderly payment default or large haircut on existing Greek debt. The EFSF will also be given additional powers to extend support to euro area sovereigns and stabilise sovereign bond prices.
Ireland and Portugal, which currently receive support from the European Financial Stability Mechanism (EFSF), will pay lower interest rates on their borrowings going forward. Set against that, however, despite statements to the contrary, the support package sets a precedent for future restructurings should the finances of another euro area sovereignbecome as problematic as those of Greece.
As for creditors of other non-Aaa sovereigns with high debt burdens or large budget deficits, the positive elements of the announcement need to be weighed against the negative implications of this precedent-setting package should any country face financing challenges similar in severity to Greece's. On balance, Moody's says that, for creditors of such countries, the negatives will outweigh the positives and weigh on ratings in future.