Greek rating slashed to 'junk' status

Moody's rating agency slashed its sovereign rating for Greece to 'junk', as EU and IMF auditors began taking a hard look at the country's attempts to slash its debt.

The agency said that considerable uncertainty about Greek plans, even with the help of an EU-IMF bailout package, to reduce its huge debt and balance its finances justified the ratings cut by four notches from A3 to Ba1.

"This uncertainty represents a risk that leads Moody's to believe that Greece's creditworthiness is now consistent with a Ba1 rating, a rating which incorporates a greater, albeit, low risk of default," Moody's said.

Athens swiftly rejected the Moody's cut, saying the government had taken major steps to balance its books.

"This downgrading in no way reflects the progress we have made in the last few months, nor the opportunities opened by our budgetary stabilisation and the improvement of our country's competitiveness," the Greek finance ministry said.

It said its budgetary measures "showed very clearly" that Greece was meeting the requirements of the EU and IMF, which have together provided Athens with a 110-billion-euro (132-billion-dollar) bailout over three years.

Moody's characterises the Ba1 rating level as below investment grade -- 'junk debt' in market parlance -- and as somewhat speculative.

The downgrade means some investors will no longer be allowed to buy Greek debt under the terms of their investment mandate and could lead to still higher borrowing costs for Athens if it goes to the markets for cash.

Bond markets saw yields -- the rate of return -- move higher on Monday, with the benchmark Greek 10-year bond at 8.302 percent, continuing well above its eurozone peers such as Germany, at 2.635 percent.

European markets were closed but on Wall Street stocks came off early highs as the announcement prompted fresh concerns that the eurozone debt crisis still has some way to run.

Moody's cut Greece's sovereign rating by one notch from A2 to A3 on April 22, warning then that a review might lead to another reduction.

It said Monday the review was now complete and the ratings outlook stable.

The decision came as International Monetary Fund, European Union and European Central Bank auditors in Athens began taking a hard look at the Greek budget to assess the impact of draconian spending cuts the government says are bearing fruit even as unions plan new protests.

The experts were sent under the terms of the bailout.

Sarah Carlson, Moody's lead analyst for Greece, said the package "effectively eliminates any near-term risk" of a default and was likely to prompt effective structural reforms.

"Nevertheless, the macroeconomic and implementation risks associated with the programme are substantial and more consistent with a Ba1 rating."

Moody's said the stable outlook reflected "the substantial probability that the rating will not change over the next 12 to 18 months."

In late April, Standard & Poor's downgraded Greece's sovereign debt to junk status, adding to the pressure on the country just before it agreed the May EU-IMF deal.

Fitch, the other major international ratings agency, warned in late May that it might cut Greece to junk status because its debt was still likely to soar to 150 percent of gross domestic product (GDP) despite the bailout deal.

Eurozone member Greece was supposed to have kept debt to 60 percent of GDP and its public deficit to three percent, compared with nearly 14 percent last year, but lax controls saw those limits set by the wayside.

As part of the conditions for the EU-IMF aid, Athens agreed to stinging spending cuts and higher taxes in an effort to restore the public finances to health, with the public deficit supposed to be under three percent by 2014.

The crisis in Greece spilled over into other weaker eurozone countries such as Spain and Portugal, with Brussels and the IMF agreeing a one trillion dollar backstop package last month in an effort to hold the line.