Moody's: Greek Covered Bonds Have Protective Measures Against Redenomination, But Their Effectiveness is Uncertain

 If Greece (Caa2 negative) were to exit the euro, Greek covered bonds' applicable law would protect investors insofar as they are still likely to receive payments in euros, says Moody's Investors Service. However, in the hypothetical scenario of a Greek exit, if mortgage loan payments are redenominated into a new Greek currency, the value of the cover pools would potentially be lower than the euro-denominated bond payments.

"Dual recourse mechanisms and the use of English law in programme documentation may protect investors," says Julie Ng, a Moody's Assistant Vice President - Analyst and author of the report. "But a foreign-exchange mismatch in the covered bond programme could weaken credit quality unless the issuer takes steps to limit the impact of this mismatch. Furthermore, if the issuer enters resolution and the collateral value is lower than the amount of the outstanding covered bonds, the shortfall could be bailed-in," Ms. Ng adds.