In October 2010, Moody’s Investors Services reduced the credit rating assigned to Greece’s government bonds from investment grade to a speculative (junk-level) rating. At the time, Greece was considered by many to be the epicenter of the European debt crisis. The debt-laden country had already received financial support packages from the European Union and the International Monetary Fund, and had agreed to a three-year austerity and reform program intended to help the country meet its debt commitments. However, the Greek economy was experiencing a lengthy recession and many economists predicted economic contraction to worsen as governmental austerity measures began to take hold.

Required:
1. Why do agencies such as Moody’s assign credit risk ratings to government bonds?
2. Briefly explain how Moody’s analysts might go about the task of assigning a credit risk rating to Greek government debt.
3. What message should current and potential investors take from the Greek debt ratings downgrade?