ATHENS, Greece — Moody's ratings agency downgraded eight Greek banks by two notches Friday due to their exposure to Greek government bonds and the deteriorating economic situation in the country, whose government has struggled to meet the terms of an international bailout.
Moody's Investors Service downgraded National Bank of Greece, EFG Eurobank Ergasias, Alpha Bank, Piraeus Bank, Agricultural Bank of Greece and Attica Bank to CAA2 from B3. It also downgraded Emporiki Bank of Greece — which is majority owned by French bank Credit Agricole — and General Bank of Greece — majority owned by another French bank, Societe Generale — to B3 from B1.
The agency said the outlook for all the banks' long-term deposit and debt ratings was negative.
Shares on the Athens Stock Exchange plunged, with the general price index shedding 4.6 percent in afternoon trading to dip below the 800 mark at 791.7 points. Bank shares were down by more than 8 percent.
Moody's cited "the expected impact of the deteriorating domestic economic environment on non-performing loans" and "declines in deposit bases and still fragile liquidity positions" in its reasoning for the downgrade.
Greece has been kept solvent by a €110 billion ($149 billion) bailout in 2010 from other eurozone countries and the International Monetary Fund. But it has needed another massive bailout this summer, and has angered international creditors by lagging behind in its commitments to implementing reforms and carrying out pledges.
European officials have begun to speak openly of the possibility of a Greek default, and the fears have further roiled international markets.
A Greek default could send shockwaves through the eurozone banking system and the global economy. European officials have tried to prevent one because it could mean losses for banks that hold Greek government bonds and prompt speculation that other governments with shaky governments could face increasingly acute funding pressures.
Dutch central bank president Klaas Knot said he could no longer rule out the possibility that the country will be unable to pay back its debts.
"I won't say that Greece cannot default," Knot said in an interview with Dutch newspaper Het Financieel Dagblad, published Friday. Knot, who recently became president of De Nederlandsche Bank, is also a European Central Bank governing council member. The ECB has insisted Greece must stick with its bailout plan and has opposed default as a solution.
"I have long been convinced that a default is not necessary," Knot said. "But the news from Athens is sometimes not encouraging. All efforts are aimed at preventing this, but I am now less positive in ruling out a default than I was a few months ago."
Greek bondholders have already agreed to take a 21 percent loss on the value of their investments in a swap for new bonds. That loss is relatively mild by the standard of government defaults, which often inflict losses of 50 percent or more. But some economists say the current swap arrangement does not give Greece enough debt relief.
Greece needs an €8 billion ($11 billion) bailout installment by mid-October to keep from defaulting on its massive debts as it moves into a fourth year of recession. Debt inspectors from the IMF, ECB and European Commission, collectively known as the troika, are due back in Athens next week to complete their review of Greece's progress and make a recommendation on whether it should receive the next loan installment.
To secure the money, the government this week announced another round of tax hikes and pension cuts, angering an already austerity-weary public.
Metro, tram and train workers in Athens went on strike Friday, while all public transport workers and taxi drivers are to hold a 48-hour strike next week. However, an Athens court ruled a 24-hour air traffic controllers' strike set for Sunday was illegal, meaning flights will operate normally over the weekend.
A nationwide general strike is set for Oct. 19.
Moody's said despite its downgrade, it "recognized the continued potential for the Troika to extend systemic support to the Greek banks in case of need," as well as the potential of a Greek financial stability fund to do the same.
This "results in a one notch of uplift in the senior debt and deposit ratings of the domestically owned banks from their standalone credit strength," the agency said.
After more than a year and a half of repeated rounds of austerity measures that have included salary and pension cuts in the public sector and waves of tax hikes, Greece has found itself in the grips of a major recession, with its chances of returning to growth next year all but out of reach. The government insists it hopes to post a primary surplus — spending less than it earns before taking interest rates on outstanding debt into account — next year.
Moody's pointed out that Greece's economy contracted 7.3 percent year-on-year in the second quarter of this year, while unemployment has risen to more than 16 percent.
This, it said, also affected the potential benefits of the announced merger of Greece's second and third largest lenders, EFG Eurobank Ergasias and Alpha Bank.
While the merger "has some potential positive elements for the credit standing of the future joint entity ... Moody's believes that these are offset by the currently fragile operating environment," the agency said.
Mike Corder in The Hague contributed.