Moody's Downgrades Greece's Debt to Junk Status
A Moody's statement said it was cutting Greece's government bond ratings by four notches to Ba1 from A3, with a stable outlook for the next 12-18 months. It was the second of the three major agencies to accord Greek bonds junk status. Standard & Poor's did the same in late April.
The downgrades reflect concern that the country could fail to meet its obligations to cut its deficit and pay down its debt - which the Greek government says is out of the question.
Finance Ministry officials in Athens had no immediate reaction to the rating cut, which came as a delegation from the International Monetary Fund and the European Union started an interim review of the country's efforts to pull itself out of a major debt crisis.
After amassing a vast public debt and overspending that sent its budget deficit spiraling to 13.6 percent of gross domestic product in 2009, Greece was saved from defaulting on its loans in May by the first installment of a joint EU and IMF euro110 billion bailout. It is to receive the second in September, pending implementation of a major austerity program that has sparked strong union reaction and a series of damaging strikes.
"The Ba1 rating reflects our analysis of the balance of the strengths and risks associated with the Eurozone/IMF support package," said Moody's lead analyst for Greece Sarah Carlson.
"The package effectively eliminates any near-term risk of a liquidity-driven default and encourages the implementation of a credible, feasible, and incentive-compatible set of structural reforms, which have a high likelihood of stabilizing debt service requirements at manageable levels."
"Nevertheless, the macroeconomic and implementation risks associated with the program are substantial and more consistent with a Ba1 rating."
Despite the downgrade, the gap, technically known as a spread, between Greek 10-year bond yields and their benchmark German equivalents dipped only slightly late Monday. The difference was at 5.91 percent, down from 6.12 percent earlier in the day.
That means that Greece would have to pay a rate of around 9 percent were it to raise cash through bond issues. However, bolstered by the rescue loans, Athens says it has no plans to try selling its bonds to the markets soon - except for short-term treasury bill issues in July.
In return for the bailout, Prime Minister George Papandreou's center-left government announced painful austerity measures, slashing pensions and salaries while increasing indirect taxes, seeking to gradually bring the deficit down to 2.6 percent in 2014. The continued flow of EU and IMF funds is conditional on Greece meeting its targets, which will remain under constant scrutiny.
Athens says it has exceeded deficit-cutting targets in the first five months of 2010, as a lower-than-expected increase in revenues was offset by higher spending cuts.
The finance ministry says the January-May deficit stood at euro8.97 billion ($10.77 billion), compared to euro14.65 billion in the first five months of 2009. The drop translates into a 38.8 percent reduction, more than the planned 35.1 percent cut.
Papandreou said late last week that Greece was back on track to "a normal financial and fiscal situation, having left the major dangers behind."
Monday's Moody's statement said the austerity package was "very ambitious."
"There is considerable uncertainty surrounding the timing and impact of these measures on the country's economic growth, particularly in a less supportive global economic environment," Carlson said.
The EU/IMF delegation, which will stay in Athens for the week, was holding meetings at the finance ministry and was expected to also meet with officials at the labor ministry in coming days to review reforms to the social security system.