Moody’s credit rating agency downgraded Greek debt by three notches yesterday and warned that the eurozone rescue was almost certain to trigger another one-notch cut to default status.
Moody’s, taking a similar line to the Fitch agency on Friday, said that once old debt had been replaced with new bonds on easier terms under the rescue scheme, it would assess the new instruments and issue a new notation.
A default rating could have unforeseeable domino effects on financial markets, but the ISDA organisation which oversees CDS default insurance contracts said the rescue terms would probably not trigger payout clauses.
Averting a default, and triggering CDS turmoil, was a key obstacle in the rescue talks, but eventually eurozone governments re-signed themselves to this possibility.
Moody’s Investors Service said that the second rescue announced on Thursday meant that private sector holders of Greek bonds “are now virtually certain to incur credit losses.”
This rescue for Greece involves initially up to 2014 about €110 billion from eurozone governments in various forms and €50 billion from banks. But Moody’s said the effect would be “limited.”
The agency, which issued two statements on the rescue, said that it had “downgraded Greece’s local- and foreign-currency bond ratings to Ca from Caa1 and has assigned a developing outlook to the ratings”.
This reflected “the current uncertainty about the exact market value of the securities creditors will receive in the exchange.”
It explained that “if and when the debt exchanges occur, Moody’s would define this as a default by the Greek government on its public debt.”
The rescue offered short-term relief both to Greece, and to the eurozone, and so reduced the risk of contagion from the debt crisis, the agency said in an overall muted assessment of the long-term effects.
On Friday, the French-US rating agency Fitch said that it would issue a restricted default rating, and would then issue a new and probably higher rating of low investment grade for the new instruments.