Moody's cuts Greek debt rating after second bailout

Greece's second bailout will have a "limited" impact on its massive debt burden, warned credit rating agency Moody's, as it put the country's debt further into "junk" territory.

Moody's cut the rating of Greek government debt to its second-lowest rating, to reflect the 'substantial economic losses' expected for debtholders. Photo: AFP

By Emma Rowley

10:24PM BST 25 Jul 2011

"Greece will still face medium-term solvency challenges: its stock of debt will still be well in excess of 100pc of GDP for many years and it will still face very significant implementation risks to fiscal and economic reform," said Moody's in a statement.

The warning came as the agency said the €159bn (£140bn) rescue deal thrashed out by eurozone leaders on Thursday means the likelihood of Athens defaulting is "virtually 100pc."

The package agreed by the 17 eurozone leaders includes a second €109bn bail-out from Europe and the International Monetary Fund, plus €50bn from the private sector via a series of bond exchanges and buy-back - the element which will be classed as a default.

The agency cut the rating of Greek government debt from Caa1 to Ca, its second-lowest rating, to reflect the "substantial economic losses" expected for debtholders.

Moody's also put the ratings of eight Greek banks on review for a possible downgrade, citing the dangers around their likely losses.

 

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Assessing the impact of the eurozone deal, Moody's said it had benefited all governments in the region by containing the risk of contagion stemming from a disorderly default or a large "haircut" or losses on Greek bonds. It also meant the path of Greece's debt would be reined in - albeit only "slightly".

However, Moody's suggested that the rescue package could ultimately threaten the positions of other countries.

"Despite statements to the contrary, the support package sets a precedent for future restructurings", said Moody's, implying other struggling euro nations could follow Greece into some sort of default. For creditors of some debt-laden states, "the negatives will outweigh the positives and weigh on ratings in future".

Supporting that fear, there were signs yesterday that investors' worries about Spain and Italy could be engulfed by the crisis continued, as their borrowing costs rose. The yields, or implied interest rates, on 10-year Spanish debt touched 6pc while 10-year Italian debt neared 5.7pc.

"We feel ... the contagion has moved to Italy and Spain and without an increase in the size of the EFSF (the eurozone rescue fund), there's no buffer being built up," said a trader.

Markets were also worried by reports that the Slovak politicians may try to block the Greek deal, flagging up the risks over getting the nod from the various parliaments. European shares dipped, with the FTSEurofirst 300, a pan-European index, slipping 0.3pc.

Moody's cuts Greek debt rating after second bailout - Telegraph