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Moody's is deliberating an eventual lowering of the Greek economy’s credit rating. Currently, the agency defines it as Caa1.

According to Moody's, this move reflects the escalation of uncertainty during the negotiations between the Greek government and its official creditors. The final result of these negotiations will determine whether the credit rating of the Greek economy will go down.

As argued by the rating agency, the results of the negotiations could have negative consequences for the country's ability to meet the demand for finance and liquidity; they will also affect the performance of Greek sovereign debt.

When reviewing Greece’s credit rating, the agency will take into account the ability of the Greek government to provide long-term financing through expansion or reform of the current bailout package. Developments of this kind would probably allow Greek banks to keep their access to the ‘easing’ operations of the European Central Bank.

Greece's new government has made clear its intention to fundamentally change the conditions of the current bailout package. According to Moody's, the results of the negotiations are uncertain, as well as the ability of both sides to reach an agreement and warrant the financing of Greece.

If the Greek government fails to reach an agreement with its official creditors during the next few weeks, the likelihood of Greece’s defaulting on its debt will increase substantially. Without a rescue programme, the country will find it hard to meet its short-term funding needs as its liquidity reserves are rather low.

Moody's reminds that the delayed tranche of € 7.2 billion, which was originally scheduled for last year, further exacerbated the country's liquidity woes and heightened its funding problems.

In this situation, Moody's sees ECB support as the key factor if the government were to issue Greek treasury bonds. However, the ability of local banks to play the role of main bond buyers depends on their access to ECB easing operations. Therefore, the ECB's decision of 4^th February not to pay Greek government bonds is a tell-tale sign.

Although the recent ECB asset quality review (AQR) ended up with the conclusion that Greek banks were in fact viable, the prospect of an increased risk of defaulting on loans may urge the ECB to reconsider it. If this happens, Greek banks could lose their access to quantitative easing operations, and this will affect the government’s ability to resume its short-term treasury bills.

Moody's, however, has argued that even if an agreement between Greece and official creditors were reached, it would still evaluate the likely consequences and possible amendments to the country’s financial and budgetary policy.

Moody's says it could also reassess Greece’s sovereign bonds in the event of an accelerated economic consolidation and structural changes, consistent economic development and a large primary budget surplus. An enhanced future outside economic support and/or political environment might also trigger a revisiting of the country's rating.

We remind you that yesterday S & P lowered Greece’s long-term rating by one notch to B- and warned that a further downgrade is possible by keeping the country on the so-called ‘creditwatch negative.’