Moody’s has placed on review for possible downgrade eight Greek banks because of their participation in government debt exchanges that form part of the country’s rescue package, with a downgrade of the sovereign to Ca also a factor.

The inclusion of the private sector in the EU support programme will directly impact the banks’ Greek government bond holdings, triggering “substantial” economic losses, Moody’s said yesterday (Monday). It cites the Institute of International Finance as indicating that investor losses are likely to exceed 20%.

Moody’s yesterday downgraded Greece from Caa1 to Ca, on developing outlook.

The banks affected by Moody’s rating action are: National Bank of Greece, EFG Eurobank Ergasias, Alpha Bank, Piraeus Bank, Agricultural Bank of Greece, Attica Bank, Emporiki Bank of Greece, and General Bank of Greece. The senior unsecured ratings of the first five banks are B3, and that of Emporiki Bank B1. Attica Bank and General Bank do not have senior unsecured ratings from Moody’s.

Alpha Bank, EFG Eurobank and National Bank of Greece are covered bond issuers whose covered bonds are rated by Moody’s. The rating agency on 12 July affirmed the ratings of the bonds at Ba3.

The review of the banks’ ratings announced yesterday will consider four factors: the impact of the materialisation of losses on the banks’ Greek government bond portfolios, risks related to exposure to Greek debt, how vulnerable banks remain to market confidence, and any applicable mitigating factors.

In several cases the banks’ government debt holdings exceed 150% of tier one capital, said Moody’s.

It is not clear what impact, if any, the review will have on Greek covered bond ratings. The Timely Payment Indicators Moody’s has assigned to Greek covered bond programmes are “improbable” save for a TPI of “very improbable” assigned to programme I of National Bank of Greece.

When Moody’s on 12 July affirmed Greek covered bond ratings at Ba3 it said that the TPI of “very improbable” assigned to NBG’s programme I restricts the rating of the covered bonds to Baa3, and that the TPIs assigned to the other programmes would cap the covered bond ratings at a higher level than they are currently rated.

“However, given the sovereign rating of Caa1, Moody’s does not currently assign ratings higher than Ba3 to covered bonds issued by Greek banks,” the rating agency said at the time.

With the exception of NBG’s programme I, all other Greek covered bonds remain investment grade — a requirement for European Central Bank repo eligibility — thanks to BBB- ratings from Fitch.

“All four covered bond programmes are rated BBB- by Fitch, but are on negative rating watch indicating a high likelihood of downgrade to junk,” said RBS senior analyst Frank Will, “which would be quite ugly for the issuers.

“The ECB applies a best rating approach and Fitch is the only agency still rating the covered bonds as investment grade; if Fitch hits on it, then of course the Greek issuers will have to find a solution.”

Fitch rates NBG’s progamme I BB+, but NBG retains repo access at the European Central Bank through its other programme.

The only Greek benchmark outstanding is off NBG’s programme I, an October 2016 issue, which has an asset swap level of 850bp.

“This bond is super-illiquid,” said Florian Eichert, senior covered bond analyst at Crédit Agricole. “The prices are very, very indicative only.”

“With ratings this low, hardly anyone I know is looking at the bond these days and it doesn’t really make a difference anymore, in this regard, whether they are BB rated or B rated.”