March 3 (Bloomberg) -- Greece’s credit rating was cut to the lowest level by Moody’s Investors Service after the country began the biggest sovereign debt restructuring ever.
Greece’s long-term foreign currency debt was downgraded to C from Ca late yesterday, with Moody’s saying in a statement that investors who participate in the nation’s debt exchange will get about 70 percent less than the face value of their holdings. The deal constitutes “a distressed exchange, and hence a default,” the New York-based rating company said.
Greece has published the formal offer document for its agreement to exchange bonds for new securities. The restructuring uses so-called collective action clauses to discourage holdouts, the use of which would trigger credit- default swap insurance contracts, according to the rules of the International Swaps & Derivatives Association.
The debt exchange aims to help reduce national debt to 120.5 percent of gross domestic product by 2020, from 160 percent last year, and to meet the terms of a 130 billion-euro ($172 billion) international bailout. The swap will slice about 100 billion euros off more than 200 billion euros of privately held debt should all investors participate.
The downgrade follows Standard & Poor’s decision on Feb. 27 to lower Greece to “selective default” after the announcement of the plan for investors to trade their bonds. It also follows a two-level reduction last week by Fitch Ratings to C, which said it will further cut Greece’s rating to “Restricted Default” once the bond exchange is completed.
The country faces a high risk of default even if the plan is successful, Moody’s said. It will be unlikely to be able to sell bonds to private investors once its bailout package runs out, according to the rating company.
Euro area finance ministers approved the exchange and financing plan, Greece’s second following a 110 billion-euro bailout in May 2010, on Feb. 21 after Greek lawmakers backed austerity measures demanded by the European Union and International Monetary Fund. The leaders of the two biggest parties, which support Prime Minister Lucas Papademos’s interim government, pledged to continue with the measures after elections, likely to take place in April.
Critics of the package, which include spending cuts and a 22 percent reduction in the minimum wage, say the program will deepen the recession, making it harder to achieve the program’s debt sustainability goals.
The European Commission forecasts Greece’s economy will shrink 4.4 percent this year, as the country goes through a fifth year of recession. Gross domestic product contracted 6.8 percent in 2011.