Moody’s: Greek Debt is More Junky with Selective Default

Moody’s (NYSE:MCO) lowered Greece’s credit rating by three notches on Monday, from Caa1 to Ca, one level above default, which Moody’s says is almost certain given the new bailout plan. The plan would give Greece 109 billion euros in government funds as well as another 37 billion euros from the private sector through a debt swap.

The downgrade put pressure on European stocks and government bonds in some of the more at-risk countries. The yield on Italy’s (NYSE:EWI) 10-year Italian bonds rose 13 basis points to 5.46%, and Spain’s (NYSE:EWP) 10-year Spanish bond yield rose 9 basis points to 5.84%.

On Friday, Fitch Ratings said the planned bond swap would count as a “selective default” and said they planned to downgrade Greece’s rating to that effect on the day the exchange closes, then reassess Greece’s rating after the debt exchange. Moody’s plans to do the same.

A large area of concern for ratings agencies is the precedent set by the bond swap. While European leaders insist that the lowered interest rates and extended loan maturities planned for Greece by the European Financial Stability Facility will not be applied to other countries, the ratings agencies think it likely in the medium term that other countries struggling with debt that have not yet received a bailout package will actually be in more danger of being contaminated by Greece’s financial problems.

However, Moody’s (NYSE:MCO) analysts still agreed with the debt exchange plan, which they expect will ultimately be able to stabilize the Greek economy and reduce the government’s debt burden. They also said the plan would benefit all euro-zone sovereigns “by containing the severe near-term contagion risk that would likely have followed a disorderly payment default or large haircut on existing Greek debt.” Now check out which Companies have dangerous exposure to Greece and which Countries do too.