Credit rating agency Moody's says the liquidity crisis leading to Grenada's default on its United States and Eastern Caribbean (EC) dollar bonds is "credit negative" for the country and elevates the risk of distress spilling over to member countries in the Eastern Caribbean Currency Union (ECCU).

The newly elected Dr Keith Mitchell administration in Grenada said it would default on the bonds due 2025 because it is unable to secure financing to make a coupon payment on Friday.

Moody's Investors Service said Grenada's default has "systemic implications for the ECCU through two channels - financial and institutional".

It said Grenada's default will elevate short-term financing costs for its peers that issue (EC dollar bonds and treasury bills on the ECCU's Regional Government Securities Market.

Moody's said sovereign defaults have also weakened the balance sheets of banks and institutional bondholders in the region.

It said the default is Grenada's second since 2004, mirroring wider distress in the ECCU.

St Kitts and Nevis defaulted on its debt in 2011, and Antigua and Barbuda restructured its debt in 2010.

Moody's said both countries have active International Monetary Fund (IMF) stand-by programmes "with embedded conditionality and structural reform requirements" while all six ECCU members, which also include St Vincent and the Grenadines, St Lucia and Dominica, "rely on emergency IMF credit facilities for financing reconstruction following the impact of hurricanes".

The credit-rating agency said government debt in the ECCU is "high," adding that the regional average was 94 per cent of Gross Domestic Product in 2012, putting it "on par with distressed Euro area sovereigns."

- CMC