Moody’s Investors Service considers Greece to have defaulted per its default definitions. The announcement comes despite Athens reaching a deal with private creditors for a bond exchange that will shave €107 billion from its €350 billion debt.
The agency pointed out that even though 85.8 per cent of the holders of Greek-law bonds had signed to the deal, the exercise of collective action clauses that Athens is applying to its bonds will force the remaining bondholders to participate.
Eventually, the overall cost to bondholders, based on the present net value of the debt, will be at least 70 per cent of the investment, Moody’s explained.
“According to Moody’s definitions, this exchange represents a ‘distressed exchange,’ and therefore a debt default,” the US rating firm said. “This is because (i) the exchange amounts to a diminished financial obligation relative to the original obligation, and (ii) the exchange has the effect of allowing Greece to avoid payment default in the future.”
Ahead of the debt deal, Moody’s had already slashed Greece’s credit grade to its lowest level, “C,” and so there was no impact on the rating.
Moody’s pointed out it had already downgraded Greece’s sovereign rating to C from Ca on March 2, further to the announcement of the debt exchange proposals. It also said it will re-evaluate the rating to see how the debt write-down and the second bailout package would affect the country’s financial sector.
On Friday, Athens announced that it had carved out a crucial bond swap deal with private investors designed to write off more than €100 million of Greek debt. The bondholders agreed to take huge losses, giving up some 74 per cent of the value of their investment.
The agreement with private investors was a crucial part of a new bailout from the EU and the IMF aimed at averting a catastrophic default which could plunge the entire eurozone into a deep crisis potentially harming the global economy.
Greece is experiencing its worst economic crisis since World War II and has been on the brink of a default with debt equal to 160 per cent of its GDP.