Moody's credit rating agency downgraded Greek debt by three notches today and warned that the euro zone rescue was almost certain to trigger another one-notch cut to default status.
Moody's, taking a similar line to the Fitch agency on Friday, said that once old debt had been replaced with new bonds on easier terms under the rescue scheme, it would assess the new instruments and issue a new notation.
A default rating could have unforeseeable domino effects on financial markets, but the ISDA organisation which oversees CDS default insurance contracts said the rescue terms would probably not trigger payout clauses.
Averting a default, and triggering CDS turmoil, was a key obstacle in the rescue talks, but eventually euro zone governments resigned themselves to this possibility.
Moody's Investors Service said that the second rescue announced last Thursday meant that private sector holders of Greek bonds 'are now virtually certain to incur credit losses'.
This rescue for Greece involves initially up to 2014 about €110 billion from euro zone governments in various forms and €50 billion from banks. But Moody's said the effect would be 'limited'.
The agency said that it had 'downgraded Greece's local- and foreign-currency bond ratings to Ca from Caa1 and has assigned a developing outlook to the ratings'.
This reflected 'the current uncertainty about the exact market value of the securities creditors will receive in the exchange.' It explained that 'if and when the debt exchanges occur, Moody's would define this as a default by the Greek government on its public debt.'
The rescue offered short-term relief both to Greece, and to the euro zone, and so reduced the risk of contagion from the debt crisis, the agency said in an overall muted assessment of the long-term effects.
On Friday, the French-US rating agency Fitch said that it would issue a restricted default rating, and would then issue a new and probably higher rating of low investment grade for the new instruments.
Fitch also said that the rescue was an important step forward but warned that unless there was general economic recovery in the euro zone and progress on cutting budget deficits, further turmoil could not be ruled out and 'downward pressure on sovereign ratings will persist'.
Moody's explained that the European Union programme, together with support from big financial institutions in the Institute of International Finance IIF, 'implies that the probability of a distressed exchange, and hence a default, on Greek government bonds is virtually 100%'.
Moody's said that although the rescue package offered a number of benefits for Greece, 'the impact on Greece's debt burden is limited'. The rescue raised the chances that Greece could stabilise and reduce its debt burden, and it helped the euro zone by 'containing the severe near-term contagion risk that would have followed a disorderly payment default.'
The agency also noted that Ireland and Portugal, which are also being rescued by the European Union and International Monetary Fund, would benefit from reduced loan rates. But, 'despite statements to the contrary, the support package sets a precedent for future restructurings'.
The effect of the rescue strategy was therefore likely to have a neutral effect on perceptions of risk for people holding Irish and Portuguese debt, it said.
Moody's also said the positive effects of new powers for the EU EFSF financial stability fund on market sentiment had to be balanced against the negative effect of a precedent being set.
ECB Greek bank funding climbs
Figures from the Greek central bank showed that ECB funding to Greek banks rose 5.6% in June from the previous month.
Lending to Greek banks increased to €103 billion at the end of June from €97.5 billion in May, the Bank of Greece said.
Greek banks lost wholesale market access in the wake of the country's debt crisis, becoming increasingly reliant on the European Central Bank.
ECB funding to Greek lenders almost doubled last year, reaching €97.7 billion at the end of December.
