Greece put on notice for possible debt downgrade

AP News
Posted: Dec 07, 2009 11:54 AM

Credit ratings agency Standard & Poor's warned Monday it may downgrade its rating on Greece's national debt amid mounting concerns about the government's ability to bring public finances under control.

In a statement, the ratings agency says it expects to complete its assessment within two months after receiving further information from the Greek authorities on their plans to reduce the deficit.

Marko Mrsnik said the "A-minus" long-term rating on Greece has been placed on so-called "CreditWatch negative" to reflect the view that the "fiscal consolidation plans outlined by the new government are unlikely to secure a sustained reduction in fiscal deficits and the public debt burden."

In the event of a downgrade, Greece would more than likely keep its investment grade rating on its debt but would have to pay higher interest rates to borrow.

In the absence of further measures, S&P projects that Greece's general government debt burden could reach 125 percent of GDP in 2010 _ the largest in the eurozone _ and remain at that level, or move higher, over the medium term.

Concerns about Greece's public finances have increased ever since October's announcement from the new center-left government of Prime Minister George Papandreou that the budget deficit this year will be much higher than expected and equivalent to around 12.7 percent of the country's gross domestic product _ well above the 3 percent maximum fixed by EU budget rules and 6 percent higher than the previous official projection.

Those worries were heightened by the news last month that Dubai World, a government investment company with $59 billion worth of debt, was looking to postpone forthcoming debt payments until May.

Investors looked around to see which country may be next to face difficulties and Greece was one that faced the heat in the markets _ the cost of insuring against a possible default shot up dramatically to the highest among the 16 nations that use the euro.

S&P did credit the government's move to announce that the shortfall will be bigger than expected from the outgoing government and its plan to bring greater transparency to the public finances in the future.

Rival credit ratings agency Moody's has also warned that it may downgrade its rating on Greece. It put Greece on notice for a possible downgrade in late October _ this is expected to be completed by early next year at the latest.