By NICHOLAS PAPHITIS and PAN PYLAS
ATHENS (AP) — Europe’s government debt crisis worsened ominously Tuesday when
Greek bonds were downgraded to junk status and Portugal’s debt was lowered on
fears the trouble could spread. Stocks slid on the news.
German reluctance to fund most of a euro45 billion bailout of Greece by
European government and the International Monetary Fund is sending shudders
through markets that the money may not reach Greece by May 19, when euro8.5
billion in bond payments come due.
Germany wants to see a commitment to deep, long-term cutbacks in Greek
government services and benefits before it agrees to provide its euro8.4
billion euro of the bailout cash. But investors remain highly skeptical that
Greek voters used to generous benefits and worker protections will accept a
drop in living standards. They also worry that the proposed bailout will not
cure Greece’s long-term imbalance between its soaring debt and tepid prospects
of economic growth.
“The downgrade results from our updated assessment of the political, economic,
and budgetary challenges that the Greek government faces in its efforts to put
the public debt burden onto a sustained downward trajectory,” said Standard &
Poor’s credit analyst Marko Mrsnik.
The move deprives Greece of an investment-grade rating on its bonds, meaning it
would pay higher costs to borrow if it taps debt markets again. The agency said
Greece’s weak long-term growth prospects made it less credit-worthy.
“The Greek bond market is now in full scale meltdown,” said Jeremy
Batstone-Carr, head of private client research at stockbrokers Charles Stanley.
“The nightmare scenario from an investor stand point is that either Greece
defaults, forcing investors to take a severe ‘haircut’ on their
investments-loans, or the Greek authorities could honor the country’s debts and
simply shut down all nonessential operations, markedly escalating the strife
for the nation’s people.”
Default would hurt the shared euro currency and could lead to the debt crisis
spreading to other countries with shaky finances such as Portugal and Spain,
threatening them with the same vicious spiral of default fears leading to
higher rates.
A debt downgrade immediately preceded Greece’s call for the bailout last week.
While Portugal has less debt, economists have focused on it as the next
possible victim if concerns over high levels of government debt in Europe
spread. Standard & Poor’s downgraded its credit rating on Portugal amid
mounting concerns about the country’s ability to get a handle on its debt load,
saying that the two-notch downgrade to A- reflects its view of “the amplified
risks Portugal faces.”