A Greek debt default would hurt other peripheral euro zone states and could push Portugal and Ireland into junk territory, Moody's said on Tuesday, warning it would classify most forms of restructuring as a default.
Markets have piled pressure on heavily indebted euro zone countries this week as investors worry not just about Greece but also about Spain, where the government suffered a major defeat in regional elections at the weekend, and after ratings agencies warned about the health of Italy and Belgium.
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"A Greek default would be highly destabilising and would have implications for the creditworthiness of issuers across Europe," Moody's Investors Service's chief credit officer in the region, Alastair Wilson, told Reuters in a telephone interview.
"This would result in more highly polarised credit worthiness and ratings among euro zone sovereigns, with the stronger countries retaining very high ratings and the weaker countries struggling to remain in investment grade."
In recent days, Standard & Poor's cut its outlook to "negative" from "stable" for Italy, which has the euro zone's biggest debt pile in absolute terms, while Fitch said it might downgrade Belgium's AA+ credit rating. Belgium has not had a proper government since elections last June though it is enjoying an economic boom.
Wilson said the focus after any Greek default would be on Portugal and Ireland, which like Greece have agreed to receive international bailouts from the European Union and the International Monetary Fund.
Asked if these two countries would risk falling into junk territory in the event of a Greek default, he said: "Potentially yes...If there were to be a Greek default, there could potentially be multi-notch downgrades to the weakest sovereigns."
He said Spain, Italy and Belgium were not in the same category as Portugal and Ireland, but would also come under significant market pressure and could face rating downgrades.
"It would be expected though that even the slightly stronger euro zone sovereigns would come under significant market pressure and very likely face higher cost of accessing the wholesale funding market," Wilson said.
He declined to say how likely it was that Greece would actually default on its debt.
Greece announced on Monday 6 billion euros worth of new fiscal steps to cut its budget deficit as well as plans to jumpstart privatisations, in an effort to convince lenders it can pay off debt without a restructuring.
Finance Minister George Papaconstantinou said Greece would not be able to honour its obligations if it did not obtain the next tranche of bailout loans. The IMF has made clear it cannot disburse money if Greece's 2012 EU funding is not assured.
The three major ratings agencies, Moody's, Fitch and S&P, have all warned they would probably consider even a "soft" debt restructuring by Greece, in which investors were given the option to accept a deal but not explicitly forced to accept one, a default.
In a statement on Tuesday, Moody's said: "A Greek default might take many forms, including changes in terms and conditions, selective 're-profiling' and large-scale 'voluntary' debt buybacks at high discounts, which Moody's classifies as distressed exchanges."
Wilson said that even forms of debt restructuring such as voluntary swaps of bonds, with credit enhancements for old bonds to support their net present values, were highly likely to be classified as defaults.
Moody's also said the Greek banking sector would need recapitalisation in case of a sovereign default, as well as continued liquidity support from the European Central Bank. It warned that a sovereign default was likely to be accompanied by some form of default on bank debt.
Fitch cut Greece's credit rating by three notches on Friday, pushing the country deeper into junk territory, and warned that any kind of debt restructuring imposed on investors would amount to a default.