A junk status downgrade for Greek debt sparked outrage in Athens and the eurozone yesterday, driving down bond prices and the euro, but Greek officials insist the country's finances are on the mend.
A decision by ratings agency Moody's to slash its assessment of Greek creditworthiness by four notches, from A3 to Ba1, drew a sharp response from European officials.
The anger at the downgrade occurred a day after EU-IMF auditors arrived to scrutinise claims by Greece that it is ahead of target in fighting its debt mountain, and a day before union protests in the streets of Athens.
Olli Rehn, European Economic and Monetary Affairs Commissioner, told the European Parliament that the action by Moody's was "surprising and highly unfortunate" and said it raised questions about the role of ratings agencies in the financial system.
Jean-Claude Juncker, head of the eurozone finance ministers' group, called the move "irrational".
The agency said that considerable uncertainty about Greek plans, even with the help of a €110 billion bailout package, to correct public finances justified the ratings.
"This uncertainty represents a risk that leads Moody's to believe that Greece's creditworthiness is now consistent with a Ba1 rating, a rating which incorporates a greater, albeit, low risk of default," Moody's said.
The downgrade means some investors will no longer be allowed to buy Greek debt under terms of their investment mandate and could lead to still higher borrowing costs for Athens if it goes to the markets for cash.
But, such a downgrading does not have the immediate dire effects as occurred at the beginning of the year.
This is because since then the Greek economy has been largely ring fenced by an EU-IMF rescue loan at below-market rates. In addition, the European Central Bank has extended easy credit terms to Greek banks, and is buying government debt bonds.
Nonetheless, the yield, or interest, that Greece would have to pay to raise money on the international bond market rose to 8.710 per cent on 10-year paper early yesterday from 8.302 per cent on Monday. Bond yields and prices move in opposite directions.
The euro also came under pressure yesterday, falling back below $1.22.
The Greek government insisted that the downgrade "in no way reflects the progress we have made in the last few months, nor the opportunities opened by our budgetary stabilisation."
The Greek press followed up yesterday, with the pro-government paper Ta Nea accusing Moody's of "sabotage."
The liberal Kathimerini described the move as "a blow below the belt".
The newspaper said the practical effect would be minimal because the European Central Bank had put in place facilities for the refinancing of Greek banks and for the purchase of Greek debt bonds.
But analysts at Citigroup Global Markets warned that strains on the Greek banking system had intensified recently, with deposit outflows accelerating and banks increasing their holdings of Greek government bonds.
Standard & Poor's in April also downgraded Greece's sovereign debt to junk status, while Fitch, the other major international ratings agency, warned in late May that it might also cut the country to the same level.
Adding to investor unease about Greek prospects are concerns that the government's remedy mix of tax rises, wage freezes and spending cuts could provoke social unrest. Recent months have seen a wave of strikes and protests and unions are planning fresh demonstrations here today.
But Greece is apparently having some success in attracting foreign investment.
China now plans to invest billions of euros in shipping, logistics and airport projects in Greece, with investment deals due to be signed during a visit to Athens by Chinese Vice-Premier Zhang Dejiang, the Financial Times reported, citing an unnamed Greek government official.