Moody's downgrade tips Greece closer to brink

Tuesday, 8 March 2011 00:00 - - {{hitsCtrl.values.hits}}

(Reuters) - Moody's slashed Greece's credit rating by three notches on Monday, raising the spectre that the distressed euro zone sovereign may be forced to restructure its debt, perhaps even before 2013.

The move increased pressure on European leaders to ease repayment terms on bailout loans to Greece, just as Germany and its allies appear to have turned their backs on radical steps to help Athens reduce its debt through bond purchases or buy-backs.

Moody's Investors Service downgraded Greek debt to B1 from Ba1 and said it may cut further, citing significant risks to the government's fiscal consolidation programme from a revenue shortfall and difficulties in reforming healthcare and state-owned companies.

"The sheer magnitude of the task becomes ever more apparent," Sarah Carlson, Moody's lead analyst on Greece, said.

The downgrade sent a ripple of concern around credit markets, raising the price of insuring Greek, Portuguese and Spanish debt against default and the risk premium on holding Greek bonds rather than benchmark German bunds.

Greece signed a 110 billion euros ($154 billion) rescue package with the EU and IMF last May to avoid default in exchange for draconian austerity measures which it has begun to implement. But many see the repayment terms as too onerous.

Even if it fulfils the entire three-year adjustment programme, its debt is projected to reach 158 percent of gross domestic product in 2013, a level widely seen as unsustainable.

"There is a risk that conditions attached to any kind of continuing support after 2013 could take solvency criteria into account that the country may not be able to satisfy, and therefore could result in a restructuring of existing debt," Carlson told Reuters.

Moody's was the first of the three major ratings agencies to classify Greek debt as "highly speculative", rating it lower than Egypt, and drew an indignant protest from Athens.

The Greek Finance Ministry said Moody's had ignored progress in implementing its fiscal consolidation plan, including an improvement in revenue collection.

"The rating downgrade announced by Moody's today is completely unjustified," it said in a statement.

But it did say the downgrade would add to Greece's problems.