Image caption Moody's said Greece "will still face very significant implementation risks" to tough austerity measures

Credit rating agency Moody's has cut Greece's rating, warning that a planned debt swap would constitute a default.

The rating was cut another three notches from Caa1 to Ca - just two more notches shy of a default rating.

"The announced EU programme... implies that the probability of a distressed exchange, and hence a default, on Greek government bonds is virtually 100%," the agency said.

The debt swap would increase Greece's borrowing terms by up to 30 years.

However, a statement last week from the Institute of International Finance - a trade body representing global banks and other major lenders - conceded that the debt deal would cost private sector creditors an estimated 21% of the value of the Greek debts they currently hold.

It comes after another rating agency, Fitch, warned that it too expected the deal would mark a "selective" debt default by Athens.

The debt exchange with private sector lenders is part of a comprehensive package announced on Thursday by European leaders to shore up the euro and prevent the Greek debt crisis from spreading to other economies, notably Spain and Italy.

Our experience is that relatively small restructurings have often been followed by deeper defaults Alastair Wilson, Moody's managing director for Europe, Middle East and Africa credit policy

'Developing' outlook

As well as the private sector debt swap deal for Greece, European leaders also agreed last week to lengthen the repayment terms on existing bail-out loans, and lower the interest rate they were charging.

Unusually, Moody's assigned the rating a "developing" outlook, instead of the more typical "positive" or "negative" outlooks.

"Looking further ahead, the EU programme and proposed debt exchanges will increase the likelihood that Greece will be able to stabilize and eventually reduce its overall debt burden," the agency said.

However, Moody's said the debt exchange only offered the country limited relief, and did not make clear how quickly Greece might be upgraded from a default rating once it is complete.

"Our experience is that relatively small restructurings have often been followed by deeper defaults," said Alastair Wilson, managing director at Moody's.

The ratings agency also warned that Greece "will still face very significant implementation risks to fiscal and economic reform".

Austerity measures demanded by Greece's European partners and the International Monetary Fund remain highly unpopular among many of the country's voters, and face continuing street protests.

Precedent

The downgrade means Moody's has followed its counterpart Standard & Poor's in giving Greece the lowest rating of any country it rates in the world, falling below Cuba and Ecuador.

Moody's also had mixed messages for the prospects of other heavily-indebted eurozone countries.

"The support package for Greece also benefits all euro area sovereigns by containing the severe near-term contagion risk that would likely have followed a disorderly payment default or large haircut on existing Greek debt," it said.

However, the agency also noted that by agreeing to impose losses on Greece's private sector lenders, European leaders had set a precedent for the other rescued countries, Portugal and the Irish Republic.