Moody's downgraded eight Greek banks Friday, citing their exposure to their government's bonds and the deteriorating economic situation in the country as it struggles to convince creditors it's doing enough to get more bailout cash.
Moody's Investors Service downgraded National Bank of Greece, EFG Eurobank Ergasias, Alpha Bank, Piraeus Bank, Agricultural Bank of Greece and Attica Bank by two notches from B3 to CAA2.
Though downgrading Emporiki Bank of Greece and General Bank of Greece, which are majority-owned by France's Credit Agricole and Societe Generale respectively, to B3 from B1, Moody's said their parents continue to provide strong support. As a result, their ratings are three notches higher than the others.
The agency also warned that further downgrades were possible by slapping a negative outlook on their ratings.
Shares on the Athens Stock Exchange plunged by more than other indexes in Europe, closing down 3.9 percent at 797.95 points. Bank shares led the rout, with declines of more than 8 percent.
Greece has been kept solvent by a euro110 billion ($149 billion) bailout in 2010 from other eurozone countries and the International Monetary Fund. But it needed another massive bailout this summer, and has angered international creditors by lagging behind in commitments to implementing reforms.
European officials are speaking openly of the possibility of a Greek default, and the fears have roiled international markets. A default could send shockwaves through the banking system and the global economy, leading to losses for banks holding Greek government bonds and dragging down other eurozone countries with shaky finances.
Dutch central bank president Klaas Knot said he could no longer rule out the possibility that Greece will be unable to pay back its debts.
"I won't say that Greece cannot default," Knot said in an interview with Dutch newspaper Het Financieel Dagblad, published Friday. Knot, who recently became president of De Nederlandsche Bank, is also a European Central Bank governing council member. The ECB has insisted Greece must stick with its bailout plan and has opposed default.
"I have long been convinced that a default is not necessary," Knot said. "But the news from Athens is sometimes not encouraging. All efforts are aimed at preventing this, but I am now less positive in ruling out a default than I was a few months ago."
Greece needs an euro8 billion ($11 billion) bailout installment by mid-October to keep from defaulting on its massive debts as it moves into a fourth year of recession. The troika is due back in Athens next week to complete its review and recommend whether Athens should receive the next funds.
"The implicit contract between Greece and the rest of the euro area _ official support in exchange for a good faith effort _ is breaking down," said David Mackie of J.P. Morgan in London.
German Finance Minister Wolfgang Schaeuble, speaking from Washington Friday, said the second, euro109 billion ($146.39 billion) bailout for Greece agreed on in July may have to be re-evaluated.
"I would be surprised if the preconditions for the payment of the next (aid) installment in September had changed, but not the preconditions for an additional program for Greece," Schaeuble said.
Officials had said at the time that the euro109 billion figure was an estimate that might need adjustment after Greece's debt inspectors from the IMF, ECB and European Commission, collectively known as the troika, had taken a closer look at financing needs. Another variable is the contribution of banks and other private investors, which are being ask to give Greece easier terms on its bonds.
But Schaeuble's comments are the most vocal acknowledgment to date that the second aid package may face a deeper review.
Greek bondholders have already agreed to take a 21 percent loss on the value of their investments in a swap for new bonds. That loss is relatively mild by the standard of government defaults, which often inflict losses of 50 percent or more. But some economists say the current swap arrangement does not give Greece enough debt relief.
To secure its next bailout installment, the government this week announced another round of tax hikes and pension cuts, angering an already austerity-weary public. Greece faces another general strike on Oct. 19, while all public transport workers and taxi drivers are to hold a 48-hour strike next week.
After repeated rounds of austerity measures that have included salary and pension cuts in the public sector and waves of tax hikes, Greece finds itself in the grip of a major recession, with its chances of returning to growth next year essentially out of reach _ the IMF predicted that the Greek economy would contract another 2 percent next year after this year's 5 percent.
The government insists it hopes to post a primary surplus _ spending less than it earns before taking interest rates on outstanding debt into account _ next year.
Mike Corder in The Hague and Gabriele Steinhauser in Washington contributed.