Jan. 14 (Bloomberg) -- Greece’s sovereign credit rating was lowered one step by Standard & Poor’s, which cited the country’s weakening finances amid the global economic turbulence.

The long-term rating was cut to A- with a “stable” outlook, S&P said today in a statement from London. Greek stocks and bonds fell after the announcement.

The fallout from the global credit crisis is battering the European economy, prompting ratings companies to reassess the risk to investors of holding the debt of some governments. S&P said Jan. 12 Spain faced “significant challenges” and may have its top AAA classification lowered. Portugal may also have its AA- rating lowered, S&P said yesterday.

“The ongoing global financial and economic crisis has, in our opinion, exacerbated an underlying loss of competitiveness in the Greek economy,” a team of S&P analysts led by London-based Marko Mrsnik said in today’s statement.

Greek bonds erased gains after the decision, with the yield on the benchmark 10-year note rising two basis points to 5.38 percent. The ASE Index of stocks extended losses, falling 5.5 percent, the most in more than two months.

The cut makes Greece the lowest rated country among the 16 using the euro. Slovakia, which began using the common currency this year, is rated A+ by S&P. Greece was downgraded to A from A+ in November 2004.

Heaviest Debt Load

Greece estimates growth this year will slow to 2.7 percent, a forecast former Economy Minister George Alogoskoufis, who was replaced last week, said may need to be revised. The forecast is “optimistic,” S&P said today.

Sliding support for the government of Prime Minister Kostas Karamanlis hampered Greece’s ability to ride out the economic slowdown by taking measures such as cutting spending. The nation, which adopted the euro in 2001, has the heaviest debt load in the 16-member region after Italy, forecast by the government to increase to more than 91.4 percent of gross domestic product in 2009. It may breach 100 percent by 2011, S&P said.

Karamanlis, who has a one-seat majority in parliament, replaced Alogoskoufis with his deputy Ioannis Papathanasiou as the ruling center-right New Democracy party battles slumping popularity. Alogoskoufis, who was credited with reducing the budget deficit from a record 7.5 percent in 2004, failed to keep a check on spending. Last year, he levied new taxes on small businesses and the self-employed, deepening a slide in support for the government.

Default Risk

“The main reason Standard & Poor’s lowered our country’s rating is that Greece is facing the global economic crisis with high public debt and deficits,” Papathanasiou said today in an e- mailed statement.

The deficit, one of the measures that determines membership of the group of countries sharing the euro, has been less than a European Union-mandated ceiling of 3 percent only once since New Democracy came to power, in 2006.

The cost of hedging against losses on Greek government debt rose 18 basis points to 250 today, according to CMA Datavision prices for credit default swaps. Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country or company fail to adhere to its debt agreements. An increase signals deterioration in the perception of credit quality.

Fitch Ratings lowered the outlook on Greece’s credit in October to “stable” from “positive” after the country revised figures for its budget deficit in 2007 to show that it breached the EU limit. Fitch rates Greece A while Moody’s Investors Service rates the country A1.

To contact the reporter on this story: Maria Petrakis in Athens at mpetrakis@bloomberg.net

Last Updated: January 14, 2009 13:09 EST