Credit rating agency Moody’s has cut Greece’s government bond rating to “Caa2” from “Caa1” on Thursday, after observing a lack of progress to reach a deal with its international lenders in time to meet upcoming debt repayments.
Moody’s has also assigned a negative outlook on the debt burdened country which illustrates a decline in the balance of economic, financial and political risks.
A “Caa2” rating is historically associated with a roughly one in four probability of default over a two-year horizon, reports Moody’s.
The fragile domestic political environment was also a key driver to lower ratings.
“The Greek government and its official creditors remain far apart on key objectives, with no immediate prospect of agreement being reached on a new financing package,” said Moody’s.
Greece is facing severe liquidity constraints and will not be able to receive further funds unless they provide a reform plan.
In an attempt to ease tensions, Greek Prime Minister Alexis Tsipras reshuffled the negotiation team and allocated Deputy Foreign Minister Euclid Tsakalotos to handle negotiations with creditors, instead of recently criticised Finance Minister Yanis Varoufakis.
Additionally, the European creditors will review the draft reform legislation to its creditors.
Tsipras is serious about fulfilling his promises and is now considering to sell two Greek ports as a concession to reach agreement.
Although both sides want to avoid a Greek default, Greece continues to face challenges.
However, the final outcome will be driven primarily by political decisions both at the European level and in Greece.Concurrently, Moody's has lowered the country's local- and foreign-currency bond ceilings to B3 from Ba3, which reflects the increased probability that Greece may exit the euro area in the event of a sovereign default.
Although Moody’s stated that a greek exit will not be their base case, the agency warned that possible impact of potential exit should not be underestimated.
As a result, Greece leaving the eurozone would offer an example that might be followed in future, said Moody’s.