Moody's pushed Greece down to a single notch above default at Ca on Monday after the deal put together to rescue Athens from its debt woes proved unacceptable to the ratings agency.
The plan would involve private investors, lower interest rates, and longer repayment schedules, and according to Moody's will make a default practically inevitable.
Reuters reported that Moody's said, "The announced EU [European Union] program 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%."
While Moody's and Fitch Ratings both said they would reassess and rerate once the bond exchange is completed, Moody's refused to say when it might consider elevating Greece's assessment. Fitch, on the other hand, has promised it will act quickly to raise Greece's rating to a higher "low speculative grade" once the bond exchange has been completed.
"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 in a statement, with Alastair Wilson, Moody's managing director for EMEA credit policy, quoted saying, "It all depends how quickly the debt exchange takes place. 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."
The exchange is expected to begin late in August and finish in early September. While markets did not react to the ratings change, with analysts saying investors were paying more attention to the fact that a rescue package will keep Athens going than to the default warning, Wilson took a dim view of the bond exchange, saying, "Our experience is that relatively small restructurings have often been followed by deeper defaults."
Involvement of private creditors could be beneficial in the short term, but bad for rescues in the long term, Moody's said, pointing out that it opens the door for more private investors to share in losses. In a statement, it said, "The support package sets a precedent for future restructurings should the finances of another euro area sovereign become as problematic as those of Greece. The impact of Thursday's announcement for creditors of Ireland and Portugal is therefore likely to be credit-neutral."