Moody's Investors Service on Friday cut Greece's sovereign debt rating to the lowest possible level after a debt-restructuring deal that imposes hefty economic losses for private creditors.
Moody's lowered Greece's local and foreign-currency bond ratings a notch to C from Ca, becoming the third credit rating agency to downgrade the country following the announcement of the swap deal to lighten its debt burden.
Moody's says that bonds rated C "are the lowest rated class and are typically in default, with little prospect for recovery of principal or interest." The rating agency added that it did not assign any future outlook.
"The announced debt exchange proposal," the credit rating agency said in a statement, "implies that private creditors that participate will incur substantial economic losses on their holdings of the Greek government debt."
On Monday, Standard & Poor's cut Greece's long-term ratings to "selective default," the second ratings agency to proceed with a widely expected downgrade after the country announced the bond swap. Fitch had announced a cut to its lowest rating above default last week.
Greece formally launched the bond swap a week ago.
Under the deal, which is part of a second 130-billion-euro rescue package to claw Greece back from the brink of a disorderly default, bondholders will take losses of 53.5 percent on the nominal value of their Greek holdings, with actual losses put at around 74 percent.
According to Moody's, "the announced proposal for private sector involvement, a precondition for the provision of further financial assistance from the euro area, would constitute a distressed exchange, and hence a default, on Greek government bonds."
The rating agency makes a distinction between a distressed exchange — where investors are losing money — and an outright default that is likely to happen when the exchange does not take place.
"Both these conditions are met in this case," Moody's said.
When the Eurogroup's assessment has been finalized and debt exchanges have been completed, Moody's will re-assess the credit risk profile and ratings of any outstanding or new securities issued by the Greek government.
Moody's concludes that "the risk of default even after the debt exchange has been completed remains high," and any upward movements in Greece's sovereign ratings after the debt exchange are likely to be small.
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