Moody's, citing risks on an EU/IMF bailout package, cut Greece's credit rating to junk status on Monday, pushing the euro down, although analysts expect little market impact from the widely expected cut.
The agency downgraded its Greek rating by four notches to Ba1, placing it one notch into junk status. The outlook is stable. Moody's also downgraded Greece's short-term issuer rating to not-prime from Prime-1.
Moody's had repeatedly said it was considering a multi-notch rating cut for Greece, which has been hammered by markets and suffered series of rating cuts since it revealed in October that its finances were in a much worse state than previously thought.
After coming within a breath of $1.23, its highest since early June, the euro slipped after Moody's cut Greece's credit rating to about $1.2215 before recovering somewhat.
Other markets were little affected by the move, with CDS unchanged at 740 basis points according to Markit Intraday.
We've been trading with this for a long time now and just the fact that the agencies finally recognize reality doesn't have too much impact, said Sebastien Galy, senior currency analyst at BNP Paribas.
Analysts said they were more concerned by risks of contagion from Greece's debt crisis, which has sent shockwaves through markets worldwide, to other indebted euro zone countries such as Spain and Portugal.
Greek government bonds will remain eligible as collateral for loans despite Moody's move after the European Central Bank decided last month to suspend its minimum threshold for Greek debt.
The EU/IMF aid package assumes that Greece will not need to borrow on markets before 2012.
Moody's said the 110-billion euro ($134 billion) pain for gain package agreed with the EU and the IMF last month was not enough to prevent the ratings cut.
The rescue package effectively eliminates any near-term risk of a liquidity-driven default and encourages the implementation of a credible, feasible and incentive-compatible set of structural reforms, which have a high likelihood of stabilizing debt service requirements at manageable levels, said Moody's senior analyst Sarah Carlson.
Nevertheless, the macroeconomic and implementation risks associated with the program are substantial and more consistent with a Ba1 rating, Carlson wrote.
The firm said Greece's credit ratings will now depend on its future economic growth and it still saw a low probability of Greece restructuring its debt.
It has a base-case scenario envisioning that Greece will implement the policy changes it needs to stabilize its debt-to-gross domestic product ratio at around 150 percent by 2013.
There is considerable uncertainty surrounding the timing and impact of these measures on the country's economic growth, particularly in a less supportive global economic environment, Carlson said. This uncertainty represents a risk that leads Moody's to believe that Greece's creditworthiness is now consistent with a Ba1 rating, a rating which incorporates a greater, albeit, low risk of default.
Fitch has no immediate plans to follow suit and cut Greece's debt to junk, a senior analyst at the ratings firm said.
We've already said that unless there was a major, unforeseen development we would wait for the last months of the year to take a view on how successful the Greek government has been in implementing the agreed policies, Chris Pryce told Reuters in a phone interview. This is still our view. We feel comfortable having it on the edge of the investment grade.
Fitch currently rates Greece at BBB-minus, the lowest investment-grade level, with a negative outlook. Standard & Poor's cut Greece's debt rating to junk status in April.
The Greek government said Moody's cut was not justified, considering progress in efforts to shore up public finances.
(Reporting by Ciara Linnane, Walden Siew and John Parry in New York and Ingrid Melander and Harry Papachristou in Athens; Writing by Ingrid Melander; Editing by James Dalgleish)