Moody’s cuts Greece credit rating and is set to put default tag on debt

MOODY’S cut Greece’s credit rating further into junk territory yesterday and said it was almost certain to slap a default tag on its debt as a result of a new EU rescue package.

It was the second rating agency to warn of a default after eurozone leaders and banks agreed last week that the private sector would shoulder part of the burden of a rescue deal that offers Greece more cash and easier loan terms to keep it afloat, and avoid further contagion.

“The announced EU programme along with the Institute of International Finance’s statement implies that the probability of a distressed exchange, and hence a default, on Greek government bonds is virtually 100%,” Moody’s said in a statement.

Bank lobby IIF, which led private sector negotiations, aims to attract 90% investor participation in the bond exchange plan which comes on top of the EU’s new €109 billion bailout.

Moody’s cut Greece’s rating by three notches to Ca, just one notch above default, to reflect the expected loss implied by the proposed debt exchanges.

Greece now has the lowest rating of any country in the world covered by Moody’s.

“Once the distressed exchange has been completed, Moody’s will reassess Greece’s rating to ensure that it reflects the risk associated with the country’s new credit profile, including the potential for further debt restructurings,” it said.

However, whereas Fitch pledged to quickly give Greece a higher, “low speculative grade” after its bonds had been exchanged, Moody’s said it could not forecast when the rating would change or how.

“It all depends how quickly the debt exchange takes place,” said Alastair Wilson, Moody’s Managing Director for EMEA Credit Policy. “Once we have greater visibility over that, we will reassess the credit profile quite quickly. Whether the rating will change, that’s a different question,” he told Reuters.

A senior EU official said on Saturday the aim was to start a voluntary swap of privately-held Greek bonds in late August and end it in early September

Greek bank shares and the broader stock market were unfazed by Moody’s action. Analysts said the downgrade and the default warning were priced in and less worrying following assurances provided by the EU deal.

“The EU Council last week effectively secured Greek banks’ continued access to ECB liquidity, even in the case that PSI (private sector involvement) triggers a selective default,” said Platon Monokroussos, an economist at EFG Eurobank.

The government has repeatedly criticised ratings firms for their downgrades and its spokesman threatened yesterday to end its subscriptions to these agencies as the new rescue package means Greece will not issue new bonds for years.