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LONDON, Feb 20 (Reuters) - Less than a week after putting Mongolia on a downgrade warning, rating agency Moody's said the prospect of an International Monetary Fund bailout proposed over the weekend could help the country's credit profile recover.
Moody's said in a statement on Monday that Mongolia's plan to exchange the debt of the country's development bank could constitute a default in technical terms, but that the prospect of IMF support should help the longer-term outlook.
The country is holding investor meetings this week to swap the bonds maturing next month for a new issue
"Depending on its terms, we may assess the bond exchange to be 'distressed' and to constitute a default by both (The Mongolian Development Bank) DBM and, as its guarantor, the government," Moody's said.
"If that is the case, the loss we expect investors to incur in the exchange relative to the original promise will inform whether Mongolia's rating should remain Caa1 or be moved lower."
However, effective implementation of fiscal consolidation and institutional reforms under an IMF programme would help stabilise and then ease the government's debt strains and shore up its dwindling foreign exchange reserves.
"Tangible evidence that this was the most likely prospects for Mongolia's credit metrics would support the sovereign's credit quality and indicate a recovery path for the rating," Moody's said. (Reporting by Marc Jones; editing by Sujata Rao)