Greece switches back to the drachma (GDR). Markets push the drachma down from its pre-conversion rate of GDR340/€1 to GDR540/€1 in Q4 2015. Over the following few quarters, there is a partial rebound to GDR440/€1, an overall drop of about 30%.
The capital controls imposed on Greek banks by its government over the weekend–including a €60 cash withdrawal daily limit, the closure of bank branches for a full working week, and the prohibition of money transfers out of Greece unless authorized by the Greek Ministry of Finance–constitute a selective default under our criteria. We have consequently lowered our long-term counterparty credit ratings on the four Greek banks we currently rate–Alpha Bank A.E. (Alpha), Eurobank Ergasias S.A. (Eurobank),National Bank of Greece S.A. (NBG), and Piraeus Bank S.A. (Piraeus)–to ‘SD’ (selective default). The rating actions reflect our opinion that private individuals’ lack of access to their deposits on a timely and in-full basis, and the constraints to their ability to transfer funds, constitute a selective default under our criteria.
Greek nonfinancial corporations. Although Greece-based corporates have reduced their exposure to Greece in recent years, the now substantially greater probability of a Grexit increases the credit risks of companies we rate. On July 1, 2015, we downgraded Greek companies with country risk exposure to the Greek economy (see “Greek Corporations Ellaktor, Public Power Corp., And OTE Long-Term Ratings Lowered Following Similar Action On Sovereign”).
Greek companies have had a few years to plan for a potential exit of Greece from the eurozone. They have reduced risks by diversifying business operations outside of Greece, moving headquarters to other jurisdictions, pooling cash in international money center banks, minimizing the amount of local debt exposed to redenomination risk, and managing counterparty credit risk. Yet, the heightened risk of a Grexit from monetary union significantly raises the risks to corporates operating in Greece, with potential credit implications if no agreement is reached between Greece and their creditors quickly after the referendum. So far, electronic payments within Greece do not appear to have been affected, although with restrictions imposed on accessing cash we would expect that many payments will be delayed or cancelled, and future provision of goods and services will inevitably require advance payment. The severe economic uncertainty and paralysis in the Greek banking sector will likely place significant strains on the corporate cash flow and liquidity of the three rated companies with greater than 50% country risk exposure to Greece–defined as proportion of revenues, assets, or earnings generated locally.
Because we now assess the risk of Greece exiting the euro at a heightened 50% probability, we subject rated corporates with more than 25% country risk exposure to Greece–and more than 10% exposure for Greece-domiciled companies–to very severe macro-economic and financial stress assumptions. These more severe stress assumptions include:
A 50% devaluation versus the euro;
· Freezing of all deposits held with Greek banks;
· Redenomination of all Greek law debt into a new local currency; and
· An assumption that these projections are stressed for at least one year.
The purpose is to assess the ability of companies to service their debt obligations, particularly foreign currency, in the event of a hypothetical sovereign default and the inevitable legal and regulatory uncertainty that this would entail. Essentially, these stresses would broadly replicate the environment that would prevail in the event of a Grexit materializing, with Greece’s Transfer and Convertibility assessment likely falling to ‘CCC’.
In this context, we currently rate seven Greek nonfinancial corporates, of which four are currently above the ‘CCC-/Negative’ rating on the sovereign (see table).