8:39 AM
ATHENS/LONDON |
ATHENS/LONDON (Reuters) - Moody's slashed Greece's credit rating by three notches on Monday due to an increased default risk, raising the specter that the distressed euro zone sovereign may have to restructure its debt, perhaps before 2013.
The move increased pressure on euro zone leaders to ease repayment terms on bailout loans to Athens, just as Germany and its allies seem to have turned their backs on more radical steps to help it reduce its debt through bond purchases or buy-backs.
Moody's Investors Service downgraded Greek debt to B1 from Ba1 -- lower than Egypt -- and said it may cut further, drawing an indignant protest from the Greek Finance Ministry.
"The likelihood of a default or distressed exchange has risen since its last downgrade of the Greek government debt rating in June 2010," Moody's said in a statement.
The downgrade sent a ripple of anxiety 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.
Portuguese government bond yields hit a euro lifetime high of 7.65 percent, heightening pressure on Lisbon to seek an EU/IMF bailout in the wake of Greece and Ireland.
Ahead of a euro zone summit on Friday, European Monetary Affairs Commissioner Olli Rehn made the case for reducing interest rates paid by Athens and Dublin on euro zone rescue loans and extending the maturities to enable them to achieve debt sustainability.
Moody's cited risks to Greece's fiscal consolidation program from a revenue shortfall and difficulties in reforming healthcare and state-owned companies.
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.
"The sheer magnitude of the task becomes ever more apparent," said Sarah Carlson, Moody's lead analyst on Greece.
Even if it fulfils the entire three-year adjustment program, 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.
"HIGHLY SPECULATIVE"
The European Central Bank, which has intervened repeatedly since last May to calm bond markets by buying euro zone peripheral sovereign debt, said it made no purchases last week in the run up to Friday's euro zone summit.
Moody's was the first of the three major ratings agencies to classify Greek debt as "highly speculative."
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