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Moody's cuts Greece's rating deeper into junk

People are seen in front of a Eurobank branch in Athens, Greece, March 19, 2015.
Alkis Konstantinidis | Reuters

Ratings agency Moody's on Thursday cut Greece's credit rating deeper into junk territory due to uncertainty over whether the indebted country will be able to reach a deal with its international lenders in time to meet upcoming debt repayments.

Moody's said it downgraded Greece's government bond rating to 'Caa2' from 'Caa1' and assigned it a "negative" outlook, reflecting the balance of economic, financial and political risks in the country is "slanted to the downside."

Fitch, Standard & Poor's and Moody's all raised Greece's rating last year as the economy showed tentative signs of getting back on its feet after six years of recession.

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But the new leftist government's standoff with its euro zone partners and the International Monetary Fund over reforms needed to unlock remaining bailout funding have clouded the outlook, Moody's said.

"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," Moody's said.

Although both sides desire a deal to avert a Greek default, and the process has taken a new sense of urgency, the agency said the final outcome will be driven primarily by political decisions.

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"The outcome of these decisions is highly uncertain and the potential for a policy accident resulting in Greece defaulting on its marketable debt, including that held by the ECB, has risen," it said.

A 'Caa2' government bond rating is historically associated with a roughly one in four probability of default over a two-year horizon.

Moody's said Greece's economy faces severe liquidity constraints hindering the government's ability to finance its budgetary spending and debt repayments since its EU/IMF bailout went off track last year.

It said Athens will need to sustain primary budget surpluses over many years to make inroads in reducing its debt burden.

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"Greece will need higher medium-term growth and political resolve. Recent events make both doubtful, raising further concerns over its ability to sustain financial support from official creditors over the coming years," Moody's said.

S&P cut its rating on Greece to 'CCC+' from 'B-' on April 15, citing worsening economic conditions due to prolonged negotiations between the country and its lenders.