Greece hit by new downgrade, EU ponders more help

By Pan Pylas

Associated Press

Published: Monday, May 9 2011 12:00 a.m. MDT

Greek Finance Minister George Papaconstantinou speaks at a conference hosted by Transparency International on Monday, May 9, 2011. Crisis-hit Greece suffered another credit downgrade Monday, with the agency Standard & Poors cutting the country's sovereign credit rating further into junk status.

Petros Giannakouris, Associated Press

LONDON — Two major credit agencies signaled their concern about Greece's massive debt on Monday, lending 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 reforms the government promised to make in return for €110 billion ($160 billion) in rescue loans last year. They were also examining whether the current bailout is enough so Athens can stand on its own feet again when the loans run out in 2013 — a scenario most investors think is unlikely.

Credit rating agency Standard & Poor's cut Greece's bond grade further into junk status Monday, saying 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, ratings agency Moody's said it had placed Greece's credit rating on review for a further possible 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," while Socialist Prime Minister George Papandreou lashed out at investors who he said were betting on Greek default.

"Credit default swaps are traded without any transparency and are threatening to bring down entire countries and entire societies," Papandreou said. "They are betting on our bankruptcy and the breakup of the euro. But their effort is in vain."

Although Greece has enacted stringent austerity measures, started reforming the economy and announced a €50 billion ($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 some €30 billion ($44 billion) over the coming years.

"It had already become apparent that Greece probably cannot meet its debt obligations over the next couple of years without further assistance," said Jane Foley, senior currency strategist at Rabobank International.

"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," she said.

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

"Then we will evaluate those results," Martin Kotthaus, spokesman for German Finance Minister Wolfgang Schaeuble, said when asked about additional help for Greece.

Market jitters were stoked Friday when Schaeuble discussed the situation with his Greek, French and Italian counterparts, as well as European Central Bank President Jean-Claude Trichet and the EU's Monetary Affairs Commissioner Olli Rehn at a meeting convened by Luxembourg Prime Minister Jean-Claude Juncker.

"We think that Greece does need a further adjustment program," said Juncker, who also chairs meetings of the eurozone's 17 finance ministers. Trichet on Monday expressed muted agreement with that position.

Still, an EU official said Monday that more help or easier bailout terms for Greece were far from a done deal. The official was speaking on condition of anonymity because of the sensitivity of the matter.

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