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Moody's places Athens on review for possible downgrade

Moody's Investors Service has placed the B1 rating of Athens on review for possible downgrade. The rating agency expects to conclude the review in the next few weeks.

Today's rating announcement on Athens follows Moody's decision to place the B1 sovereign rating of Greece on review for possible downgrade. Moreover, it reflects the ongoing uncertainties arising from the implications of local government reforms on the city's finances, which are included within national plans to curb public spending. “Moody's review will focus on assessing the credit aspects of the sovereign, which to date have influenced the credit quality of the city and the impact of any government policy change affecting the city's finances and, ultimately, its ability to honor financial obligations” says Gianfilippo Carboni, Moody's lead analyst for Athens.

“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,” explains Carboni. The rating agency also recognizes 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.

Moody's will continue to monitor closely the impact of significant national austerity measures on the city's finances. This includes those related to the Kallikrates reform, which involves significant changes in funding and responsibilities for Greek municipalities during a time of pronounced governmental austerity. “The impact of government reforms on Athens is difficult to assess given the uncertainties regarding the timing and the specific mechanisms of its implementation,” says Carboni. Furthermore, the rating agency notes that there are uncertainties regarding the direction and implementation of strategies to achieve financial balance by the new municipal government in Athens which came into power in January 2011.

The rating agency points out that the city expects worse-than-originally anticipated results for FY 2010, due to higher cuts in government transfers and lower charges linked to the economic activity in the municipal area. Cost-cutting measures have only partly compensated for falling revenue during the year. However, Athens’ debt-service capacity and liquidity position have remained stable overall, reflecting the city's modest, albeit growing, debt burden and conservative capital investments. From 2011, the rating agency says that the city's financial performance remains highly unpredictable and will depend on the response of the new municipal government to ongoing challenges associated with the implementation of local government reforms and a weakening economy.