- Associated Press - Monday, June 14, 2010

ATHENS (AP) — Moody's Investors Service on Monday slashed Greece’s credit rating to junk status as a delegation from the International Monetary Fund and the European Union started an interim review of the country’s efforts to pull itself out of a major debt crisis.

A Moody's statement said it was cutting Greece’s government bond ratings by four notches, to Ba1 from A3, with a stable outlook for the next 12 to 18 months. It was the second of the three major agencies to accord Greek bonds junk status since Standard & Poor’s did the same in late April.

The downgrades reflects concern that the country could fail to meet its obligations to cut its deficit and pay down its debt.

After amassing a vast public debt and overspending that sent its budget deficit spiraling to 13.6 percent of gross domestic product in 2009, Greece was saved from defaulting on its loans in May by the first installment of a joint EU-IMF 110 billion euro ($134.5 billion) bailout. It is to receive the second installment in September.

“The Ba1 rating reflects our analysis of the balance of the strengths and risks associated with the Eurozone-IMF support package,” said Sarah CarlsonMoody's lead analyst for Greece.

“The package effectively eliminates any near-term risk of a liquidity-driven default and encourages the implementation of a credible, feasible and incentive-compatible set of structural reforms, which have a high likelihood of stabilizing debt service requirements at manageable levels,” Ms. Carlson said.

“Nevertheless, the macroeconomic and implementation risks associated with the program are substantial and more consistent with a Ba1 rating,” she added.

In return for the rescue loans, Prime Minister George Papandreou’s center-left government announced painful austerity measures, slashing pensions and salaries while increasing indirect taxes, seeking gradually to bring the deficit down to 2.6 percent in 2014.

Athens says it has exceeded deficit-cutting targets in the first five months of 2010, as a lower-than-expected increase in revenues was offset by higher spending cuts.

The Finance Ministry said the January-May deficit stood at 8.97 billion euros ($10.77 billion), compared with 14.65 billion euros ($17.9 billion) in the first five months of 2009. The drop translates into a 38.8 percent reduction, more than the planned 35.1 percent cut.

Mr. Papandreou said late last week that Greece was back on track to “a normal financial and fiscal situation, having left the major dangers behind.”

Monday’s Moody's statement said the austerity package was “very ambitious.”

“There is considerable uncertainty surrounding the timing and impact of these measures on the country’s economic growth, particularly in a less supportive global economic environment,” Ms. Carlson said.

The EU-IMF delegation, which will stay in Athens for the week, was holding meetings at the Finance Ministry and was expected to also meet with officials at the Labor Ministry in coming days to review reforms to the social security system.