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ATHENS, Greece (AP) — Moody’s downgraded Greece’s bond ratings by
a further three notches Monday and warned that it is almost
inevitable the country will be considered to be in default
following last week’s new bailout package.
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The agency said the new EU package of measures implies
“substantial” losses for private creditors. As a result, it cut its
rating on Greece by three notches to Ca – one above what it
considers a default rating.
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Though Moody’s said a Greek debt default is “virtually certain,” it
noted that the new measures will increase the likelihood that
Greece will be able to stabilize and eventually reduce its overall
debt burden.
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It also said the package also benefits other eurozone countries by
“containing the near-term contagion risk that would likely have
followed a disorderly payment default or large haircut on existing
Greek debt.”
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In recent weeks, financial markets have been rocked by fears that
much bigger economies like Spain and Italy may get dragged into
Europe’s debt crisis mire, which has also seen Ireland and Portugal
bailed out alongside Greece.
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Eurozone countries and the International Monetary Fund last week
agreed to give Greece a second bailout worth euro109 billion ($155
billion), on top of the euro110 billion granted in rescue loans a
year ago.
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If all goes to plan, banks and other private investors will
contribute some euro50 billion ($71 billion) to the rescue package
until 2014 by swapping Greek bonds that they hold for new ones with
lower interest rates or slightly lower face value, or selling the
bonds back to Greece at a low price
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“The support package incorporates the participation of private
sector holders of Greek debt, who are now virtually certain to
incur credit losses,” Moody’s said in a statement. “If and when the
debt exchanges occur, Moody’s would define this as a default by the
Greek government on its public debt.”
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Despite Greece’s new package, which was more comprehensive than
many in the markets had predicted, Moody’s said it’s going to take
many years of hard graft for Greece to get complete control of its
debts.
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“Greece will still face medium-term solvency challenges – its stock
of debt will still be well in excess of 100 percent of GDP for many
years and it will still face very significant implementation risks
to fiscal and economic reform,” Moody’s said.
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The agency added that it will reassess Greece’s rating once the
bond exchange has been completed “to ensure that it reflects the
risk associated with the country’s new credit profile, including
the potential for further debt restructurings.”
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On Friday, ratings agency Fitch also said Greece faced a default
but that it would reassess the rating once the new bonds are issued
– implying that the bad rating might only last for a few
days.
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While Greece’s brush with default will be a first for a euro
country, the immediate practical consequences of the rating for
Greece should be limited.
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For weeks, the overriding fear was that, because of the bad rating,
already struggling Greek banks would be frozen out of the European
Central Bank’s emergency liquidity operations.
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However, last week eurozone leaders found a way around that threat
by promising to temporarily deposit euro35 billion with the ECB to
boost the creditworthiness of defaulted bonds used as collateral by
Greek banks, until the default rating has been lifted.
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Crucially for Greece and Europe as a whole, the International Swaps
and Derivatives Association, a trade association, said the new
rescue deal is not expected to trigger payment of bond insurance
because private sector involvement is voluntary.
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Gabriele Steinhauser in Brussels contributed to this
story.
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