Greece Rating Cut to Junk by Fitch; Outlook Negative

Greece lost its last investment grade rating as Fitch Ratings downgraded the country’s debt one level to BB+, or junk.

The cut was foreshadowed by a warning last month and puts the rating at the same level as at Moody’s Investors Service and Standard & Poor’s. The Fitch grade has a negative outlook, indicating that the credit evaluator is more likely to cut it than to raise it or keep it unchanged.

The country’s “heavy public debt burden renders fiscal solvency highly vulnerable to adverse shocks,” Fitch analysts led by London-based Chris Pryce said in a report today.

Successful bond auctions by Portugal, Spain and Italy this week prompted a rally that nudged European bond yields lower. The region’s governments are considering a package of proposals to contain the euro-area’s debt crisis, which may include purchasing outstanding Greek debt.

The euro stayed lower against the dollar following the downgrade, trading 0.2 percent weaker at $1.3344. The yield in the U.S. 10-year Treasury note was little changed at 3.29 percent.

Eight months after a European Union-led bailout, investors are still charging Greece 807 basis points more to lend to it over 10-years than to Germany. That spread reached a record 974 basis points on Jan. 7. The credit crisis has since spread to Ireland and may engulf Portugal, forcing EU governments to begin crafting new policies to stop the rot before it reaches Spain.

‘Problems Still There’

"The fact that the auctions are going pretty well lifted the market mood, but I expect this effect to be short-lived because the problems are still there," said Chiara Cremonesi, a fixed-income strategist at UniCredit SpA in London, by phone.

Their latest plan, elements of which will be debated when finance ministers meet next week, may extend help to Portugal, increase the size of their aid reserves, lower interest rates on bailout loans, and authorize purchases of outstanding bonds.

Fitch’s decision "underlines once again the need for a new framework for credit rating companies on a European level," the Finance Ministry in Athens said in an e-mailed statement. Government measures for the economy are beginning to show results and the country is "standing upright and moving forward," Finance Minister George Papaconstantinou said earlier today.

Fiscal Consolidation

Figures for the general-government deficit last year, to be announced in a month, will show that the nation achieved the biggest fiscal adjustment in history by cutting the shortfall by six percentage points, he told lawmakers in Athens today.

Fiscal consolidation will "still have to be sustained over several years," Fitch said, adding that tax administration remains weak and tax evasion is prevalent. General government debt will peak at almost 160 percent of gross domestic product and interest payments will rise to 20 percent of revenue by 2014 "even under a favorable base-case scenario," it said.

The negative outlook reflects the view “that public debt sustainability is still very fragile and renewed access to market financing uncertain,” Fitch said. Moody’s lowered its ranking for the nation to Ba1 from A3 on June 14 and S&P reduced Greece to BB+ from BBB+ on April 27.

The economy will probably contract 3 percent this year after shrinking 4 percent in 2010, according to Fitch. Failure to emerge from recession "would place further downward pressure on Greece’s ratings," it said. Stronger-than-expected economic recovery and the implementation of an International Monetary Fund program may lift the rating outlook to stable.

To contact the reporter on this story: Simon Kennedy at skennedy4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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