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Moody's downgrades Greek debt again, warns of default

By the CNN Wire Staff
Greek PM George A. Papandreou, after July 21 EU summit with European Council President and European Commission President.
Greek PM George A. Papandreou, after July 21 EU summit with European Council President and European Commission President.
  • Moody's downgrades Greek government bonds from Ca to Caa1
  • The probability of bond default is "virtually 100%," the ratings agency says
  • Creditor losses will likely top 20%, it anticipates
  • Bailouts help protect the Eurozone from contagion and give Greece a chance to stabilize

(CNN) -- International credit rating agency Moody's announced Monday it has once again downgraded Greek's sovereign debt rating - just four days after European leaders agreed on a second bailout for the debt-strapped nation.

A default on Greek debt instruments was near to certain, Moody's said in an announcement published to its website Monday. But EU bailouts to Greece will likely help the country to stabilize down the road and prevent a default domino effect in the Eurozone, Moody's added.

"Moody's Investors Service has today downgraded Greece's local- and foreign-currency bond ratings to Ca from Caa1," Moody's said, calling the probability of a default on Greek government bonds "virtually 100%."

The agency based the default assessment on the "announced EU program" and a statement on debt reassignment by the Institute of International Finance (IFF), which represents financial institutions.

The IFF has indicated that private creditors holding Greek debt instruments would likely take losses over 20%, Moody's said.

Under debt reassignment, holders of current bonds would receive new ones in their place. The lower market value of the replacement bonds would account for the investor losses.

The EU bailout to Greece protected all countries holding Europe's common currency the euro, Moody's said, by "containing the severe near-term contagion risk that would likely have followed a disorderly payment default or large haircut on existing Greek debt."

A "haircut" is slang for repaying bondholders less than they were promised when they bought the bonds.

European leaders agreed on Thursday to provide a second bailout package for Greece and drastically expand rescue funds to prevent financial crisis spreading through the eurozone.

European Council president Herman Van Rompuy said the rescue deal would be financed by both the EU and the International Monetary Fund.

European governments and the IMF will contribute a total of 109 billion euros (about $157 billion). The private sector's share will amount to 49.6 billion euros (about $71 billion).

But other weaker European economies such as Italy and Spain -- seen as too big to bail out -- could falter, tearing apart the eurozone, and hurting other nations exposed to the debt take.

Greece has been forced to impose harsh austerity measures, provoking violent scenes of protest, in an attempt to cut its debts. Taxes have been raised and public sector jobs cut. It is also selling off numerous assets.

CNN's Ben Brumfield and CNNMoney's Ben Rooney contributed to this report.

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