Credit downgrade deals fresh blow to Greek economy

ATHENS (AFP) – Greece was hit with a credit rating downgrade on Wednesday in a fresh blow for the government as it grapples with a crisis that has raised wider fears over debt levels in other European economies.

Greek trade unionists meanwhile prepared to take to the streets on Thursday in a show of force against austerity measures unveiled earlier this week by Prime Minister George Papandreou in a bid to tame spiralling debt levels.

International ratings agency Standard and Poor's (SP) lowered Greece's long-term credit rating to BBB+ from A- and warned it could drop the level further unless the government managed to get its finances in order soon.

The reaction to the news on financial markets was swift and sharp, with the European single currency that Greece shares with 15 other countries falling to 1.4506 dollars from 1.46 dollars before the announcement.

The BBB+ rating is still considered investment-grade but is below the European Central Bank's standard requirements. Another credit rating agency, Fitch, also downgraded Greece to BBB+ from A- last week.

Greece's public deficit is set to rise to 12.7 percent of output this year, far above the eurozone limit of 3.0 percent. The debt is also expected to rocket up to 113 percent of output in 2009 against an EU target of 60 percent.

Standard and Poor's (SP) said Greece's cost-cutting plans "are unlikely, on their own, to lead to a sustainable reduction in the public debt burden."

Reforms to cut public spending face "domestic obstacles that would likely require sustained efforts over a number of years to overcome," it added.

Gary Jenkins, an analyst at Evolution Securities investment bank, was quoted by the Financial Times as saying that the downgrade "will cause even more volatility for Greece's sovereign debt."

He added that the warning by Standard and Poor's that it could lower Greece's credit rating further was "very bad news as it will create further uncertainty regarding how low the rating can go."

German Finance Minister Wolfgang Schaeuble earlier on Wednesday warned the debt situation in Greece was now of "great concern" after meeting with his Greek counterpart George Papaconstantinou in Berlin.

Papaconstantinou, who has met with the British, French and German finance ministers on a tour of European capitals this week in a bid to calm fears, is set to meet institutional investors in Frankfurt on Thursday.

"We take seriously all international evaluations concerning and affecting our country. But we have our strategy and will stick to it," a finance ministry statement said, while acknowledging the country had a "credibility deficit."

The ministry added that Greece's reform strategy "cannot and must not be evaluated on a day-to-day basis. It will be evaluated at the proper time."

The drama in Greece -- described by the finance ministry as the worst debt crisis in recent Greek history -- has raised jitters on the solvency of other heavily-indebted European economies.

Papaconstantinou has said Greece is prepared to do "what it takes" to regain international trust in its economy but warned: "Credibility takes time to build and the window of opportunity is very small."

The government faces a serious challenge from a wave of industrial action -- with school teachers, state hospital doctors, dock workers and journalists expected to walk off the job on Thursday in protest against cost-cutting measures.

Papandreou has promised curbs on public sector hiring and pay, a 10 percent cut in civil servant benefits, a reduction in military spending, a 90 percent tax on bonuses at banks and an overhaul of the fiscal system.

But the European Union wants more, with the bloc's top economic enforcer Joaquin Almunia saying the EU awaited "concrete measures that will strengthen fiscal adjustment in 2010."

The markets have also been sceptical this week and the yield difference, or spread, between Greek and German government bonds has shot up, meaning that Athens needs to offer higher interest rates to attract fresh loans.

"We think that volatility of Greek spreads is likely to persist until the government effectively implements measures," analysts from French bank BNP Paribas said in a note to investors.

But the bank expressed the view that a Greek default "is not the most likely scenario" given the support likely from Greece's European partners anxious to avoid a potentially fatal blow to the euro currency zone.