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Petros Giannakouris, Associated Press
A man shields himself from the sun as he crosses the street in front of the Central Bank of Greece building in central Athens on Monday, July 25, 2011. Earlier Monday, Moody's international credit rating agency slashed Greece's rating by three notches to the last toehold above a default. Moody's signaled it was likely to slap a default rating on Greece as a result of its latest international bailout deal, which anticipates losses to private holders of Greek government debt.

ATHENS, Greece — Moody's downgraded Greece's bond ratings by a further three notches Monday and warned that it is almost inevitable the country will be considered to be in default following last week's new bailout package.

The agency said the new EU package of measures implies "substantial" losses for private creditors. As a result, it cut its rating on Greece by three notches to Ca — one above what it considers a default rating.

Though Moody's said a Greek debt default is "virtually certain," it noted that the new measures will increase the likelihood that Greece will be able to stabilize and eventually reduce its overall debt burden.

It also said the package also benefits other eurozone countries by "containing the near-term contagion risk that would likely have followed a disorderly payment default or large haircut on existing Greek debt."

In recent weeks, financial markets have been rocked by fears that much bigger economies like Spain and Italy may get dragged into Europe's debt crisis mire, which has also seen Ireland and Portugal bailed out alongside Greece.

Eurozone countries and the International Monetary Fund last week agreed to give Greece a second bailout worth €109 billion ($155 billion), on top of the €110 billion granted in rescue loans a year ago.

If all goes to plan, banks and other private investors will contribute some €50 billion ($71 billion) to the rescue package until 2014 by swapping Greek bonds that they hold for new ones with lower interest rates or slightly lower face value, or selling the bonds back to Greece at a low price

"The support package incorporates the participation of private sector holders of Greek debt, who are now virtually certain to incur credit losses," Moody's said in a statement. "If and when the debt exchanges occur, Moody's would define this as a default by the Greek government on its public debt."

Despite Greece's new package, which was more comprehensive than many in the markets had predicted, Moody's said it's going to take many years of hard graft for Greece to get complete control of its debts.

"Greece will still face medium-term solvency challenges — its stock of debt will still be well in excess of 100 percent of GDP for many years and it will still face very significant implementation risks to fiscal and economic reform," Moody's said.

The agency added that it will reassess Greece's rating once the bond exchange has been completed "to ensure that it reflects the risk associated with the country's new credit profile, including the potential for further debt restructurings."

On Friday, ratings agency Fitch also said Greece faced a default but that it would reassess the rating once the new bonds are issued — implying that the bad rating might only last for a few days.

While Greece's brush with default will be a first for a euro country, the immediate practical consequences of the rating for Greece should be limited.

For weeks, the overriding fear was that, because of the bad rating, already struggling Greek banks would be frozen out of the European Central Bank's emergency liquidity operations.

However, last week eurozone leaders found a way around that threat by promising to temporarily deposit €35 billion with the ECB to boost the creditworthiness of defaulted bonds used as collateral by Greek banks, until the default rating has been lifted.

Crucially for Greece and Europe as a whole, the International Swaps and Derivatives Association, a trade association, said the new rescue deal is not expected to trigger payment of bond insurance because private sector involvement is voluntary.

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Greek government spokesman Elias Mossialos brushed off Moody's downgrade as of "no practical value," arguing that domestic lenders can count on secure credit lines under the terms of the new bailout.

"Unfortunately for them, (ratings agencies) won't have anything to work on for many years," he said in a radio interview. "Perhaps the finance ministry should cancel its subscriptions, because I think the Greek government pays subscriptions to these agencies to receive their results ... I don't think we need them any longer."


Nicholas Paphitis in Athens and Gabriele Steinhauser in Brussels contributed to this story.