Moody's Investors Service on Monday cut Greece's sovereign debt by three notches to Ca from Caa1, warning the second bailout of Greece is likely to result in a default and weaken the credit ratings of the stronger European nations.
The rating agency warned in a statement that it is inevitable that Greece will be deemed in default as “the support package incorporates participation of private sector holders of debt who are now virtually certain to incur credit losses. If and when the debt exchanges occur, we would define this as a default by the Greek government on its public debt.”
The €109bn support package for Greece announced after last Thursday's summit in Brussels benefits all euro area sovereigns by containing the contagion risk that would likely have followed a disorderly payment default on existing Greek debt, Moody's said.
“However, the credit implications of the announcement for creditors of individual countries depend on the balance of the positive market-stabilising elements of the plan and the negative precedent set by the endorsement of distressed exchanges between Greek creditors and the sovereign,” it added.
Moody's said it will reassess Greece's ratings once any proposed debt exchanges have taken place.
It said: “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. While the rating agency believes that the overall package carries a number of benefits for Greece, a slightly reduced debt trajectory, lower debt-servicing costs, as well as reduced reliance on financial markets for years to come, the impact on Greece's debt burden is limited.”