Greece on the brink

Moody’s
slashed Greece’s credit rating by three notches raising the spectre that the
distressed euro zone sovereign may be forced to restructure its debt, perhaps
even before 2013.

The
move increased pressure on European leaders to ease repayment terms on bailout
loans to Greece, just as Germany and its allies appear to have turned their
backs on radical steps to help Athens reduce its debt through bond purchases or
buy-backs.

Moody’s
Investors Service downgraded Greek debt to B1 from Ba1 and said it may cut
further, citing significant risks to the government’s fiscal consolidation
programme from a revenue shortfall and difficulties in reforming healthcare and
state-owned companies.

The
downgrade sent a ripple of concern around credit markets, raising the price of
insuring Greek, Portuguese and Spanish debt against default and the risk
premium on holding Greek bonds rather than benchmark German bonds.

Greece
signed a $154 billion rescue package with the EU and IMF last May to avoid default
in exchange for draconian austerity measures which it has begun to implement.

But
many see the repayment terms as too onerous.

Even
if it fulfils the entire three-year adjustment programme, its debt is projected
to reach 158 per cent of gross domestic product in 2013, a level widely seen as
unsustainable.

Moody’s
was the first of the three major ratings agencies to classify Greek debt as
“highly speculative”, rating it lower than Egypt.

Euro
zone leaders will hold summit talks on Friday to discuss measures to enforce
stricter budget discipline, boost economic competitiveness and strengthen the
bloc’s financial rescue fund in an attempt to draw a line under the debt
crisis.

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