Following a dire EU evaluation of Greece's public deficit and a day of general strikes across the country Thursday, Moody's downgraded the country's debt from A2 to A3, warning that another could be in the pipeline.
AFP - Blows rained on Greece Thursday as it said it could meet its tough fiscal targets only to be hit with a gloomy EU revision of its deficit, a daunting rise in borrowing costs and a new ratings downgrade.
In a dire day for Athens, the EU said Greece's public deficit stood at 13.6 percent of output last year -- much higher than a government estimate of 12.9 percent -- while the rate on Greek 10-year debt bonds jumped to nearly 8.8 percent.
A few hours later, another blow came from Moody's which cut Greece's sovereign debt rating a notch from A2 to A3, warning that the country must likely pay a high cost to stabilise its debt.
"Moody's Investors Service has today downgraded the government bond ratings of Greece to A3 from A2 and placed them on review for further possible downgrade," the agency said.
"This decision is based on Moody's view that there is a significant risk that debt may only stabilise at a higher and more costly level than previously estimated," it added.
The Athens stock market index took a nosedive, shedding nearly four percent by the close -- just before news of Moody's downgrade which can be expected to put even more pressure on government borrowing costs.
The government earlier said it had already taken preventative steps and that the EU's revised public deficit figure would not affect its goals.
"These estimates do not change the target we have set for 2010 to reduce the deficit by four percent (of Gross Domestic Product)," Prime Minister George Papandreou told an informal cabinet meeting.
"We have already taken difficult decisions that overshoot this goal," he said, according to a statement from his office.
The government enacted spending cuts and tax hikes worth around 16 billion euros (22 billion dollars) this year as it struggles to right the public finances as it became apparent that the recession dragging down the Greek economy is deeper than originally forecast.
Because of the weaker economic performance, the finance ministry recently said the budget deficit for last year would be at least 12.9 percent.
Given the pressure on Athens to raise money for looming debt payments, analysts believe the government has no choice but to call on a rescue package recently agreed with the European Union and the International Monetary Fund.
"Greece is in the midst of another hellish week and now faces no choice but to seek to formally activate the European rescue package," Capital Economics analyst Ben May said in a note.
"While this may help to ease the markets’ frazzled nerves, the latest upward revision to the 2009 budget deficit highlights the mammoth task ahead."
The government has pledged to meet its next payments due in May, estimated at some 10 billion euros, whether by raising fresh money on the market or by activating the fall-back EU-IMF loan.
An issue of 10-year Greek bonds totalling 8.5 billion euros expires on May 19.
"It is our historic (responsibility) to take any decision that prevents the worst possible development for Greeks," Papandreou said.
Greece is currently in talks with officials from the European Union, the European Central Bank and the IMF on the technical aspects of the loan expected to give access to up to 45 billion euros at five percent in a first year.
Finance Minister George Papaconstantinou said on Wednesday that he expected the loan deal to be finalised by mid-May.
The crisis has caused deep strains within the EU and 16-nation eurozone, highlighted by an IMF warning on Wednesday that the Greek crisis could spillover to other member states.
"In the near term, the main risk is that, if unchecked, market concerns about sovereign liquidity and solvency in Greece could turn into a full-blown sovereign debt crisis, leading to some contagion," the IMF said.
The austerity cuts have sparked strong protests among unions, casting further doubt on the government's ability to get through.
Several thousand people marched in Athens and Thessaloniki in separate protests called by Communist and civil servant labour organisations and the country faces the likelihood of more protests.
Date created : 2010-04-22