Moody’s Investors Service has downgraded Greece by three notches, warning that the proposed bailout package would constitute a default.
The credit ratings agency cut the country’s local and foreign-currency bond ratings from Caa1 to Ca – which is just two notches above default – citing the proposed private sector involvement in the European Union’s support package as the reason for the downgrade.
A statement by the organisation says: “The announced EU programme along with the Institute of International Finance’s [IFF] statement … implies that the probability of a distressed exchange, and hence a default, on Greek government bonds is virtually 100 per cent.”
Moody’s adds the new rating reflects the uncertainty over the exact value of the securities Greek bondholders will receive through the debt exchange. The agency will reassess the country’s credit risk profile after the exchanges have been completed.
However, it says the EU support package and proposed debt exchange will increase Greece’s chances of stabilising its finances and reducing its debt burden, although the country has to continue with its ongoing fiscal and economic reform.
In addition, Moody’s claims the bailout package will lower the contagion risk that could affect the eurozone in the wake of a disorderly payment default or large haircut on existing Greek debt.
Last week, Fitch said the proposed private sector involvement in the bailout programme, as detailed by the IFF, would constitute a restricted default.