June 2, 2011
The cost of insuring Greek government bonds rose on Thursday after ratings agency Moody's said there was now a 50% chance of the country defaulting on its debts.
The warning came as Moody's cut Greece's credit rating to Caa1, almost the lowest rating assigned to any country. The move intensified the pressure on European leaders as negotiations over a second rescue package for Greece continued in Vienna.
This "troika review", involving the European Union, the International Monetary Fund and the European Central Bank, is also considering what additional measures Greece must take in return for the next instalment of its original bailout plan.
Greece is understood to have agreed to €6.4bn (£3.9bn) of fresh austerity measures, including tax increases and accelerated privatisations. The next tranche of Greece's original aid deal, worth €12bn, is seen as vital by Greek officials to pay public sector wages and pensions.
Moody's justified the downgrade by arguing that Greece will fail to meet the deficit reduction targets that were set as part of its existing bailout deal. The Athens government, though, said Moody's had failed to appreciate the efforts it is taking to bring its debts under control.
"Over five-year investment horizons, around 50% of Caa1-rated sovereigns, non-financial corporate and financial institutions have consistently met their debt-service requirements," Moody's said. "Around 50% have defaulted."
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