Greece is hit by new downgrade

Posted: May 10, 2011

LONDON - Two major credit-rating agencies Monday signaled their concern about Greece's huge debt, giving new credence to the view that European authorities must do more to help the country a year after it barely avoided bankruptcy with a bailout.

Experts from the European Union and the International Monetary Fund were in Greece on Monday to check up on economic changes the government promised to make in return for $160 billion in rescue loans last year. They were also examining whether the current bailout was enough so Athens could stand on its own when the loans run out in 2013 - a scenario most investors think is unlikely.

The credit-rating agency Standard & Poor's cut Greece's bond grade further into junk status Monday, saying it was increasingly likely that Greece would be given more time to repay its bailout loans and that Greece would negotiate a similar deal on bonds held by commercial investors.

S&P, which downgraded the long-term bonds to B from BB-, said Greece might eventually have to resort to a partial default, reneging on as much as 50 percent of its debt. As a result, the agency said it could downgrade Greece again in coming months.

Also Monday, the ratings agency Moody's Investors Service said it had placed Greece's credit rating on review for possible further downgrade, citing the "increased uncertainty about the sustainability of Greek sovereign debt."

Greece's government called the downgrade "not justified" and based largely on "market rumors and press reports." Socialist Prime Minister George Papandreou lashed out at investors who he said were betting on a Greek default.

Although Greece has enacted stringent austerity measures, started reforming the economy and announced a $73 billion privatization program, improvements to public finances are slowing down.

In particular, the government is having trouble raising revenue through taxes as the country remains in recession. The upshot is a financial shortfall estimated at $44 billion over the coming years.

"Rather than return to the market next year as the original bailout has assumed, it now seems fairly likely that Greece will instead ask for more funds from the EU," said Jane Foley, senior currency strategist at Rabobank International.

The trigger to further action will likely be June, when the EU/IMF appraisal is reported.

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