Greece's Credit Rating Crash Puts It in 'Junk' Land

ATHENS, Greece -- This country's credit rating has crashed once more, standing, now, on a par with Angola and Vietnam, and leaving the government in Athens jaded.

Moody's Investor Services downgraded Greece's debt by three notches to "highly speculative" status -- way below even debt-troubled Ireland, Portugal and Spain. The downgrade fixes the eurozone nation firmly into "junk" territory.

Cash-strapped Greece averted bankruptcy in May when its European Union partners and the International Monetary Fund cobbled together a $146 billion bailout in exchange for sweeping cutbacks, aggressive reforms and privatization of ailing state-owned entities.

Nearly a year later, the government has succeeded in shaving six percentage points off a yawing budget deficit of 15.4 percent. Still, Moody's warned, "ambitious" fiscal and structural reforms announced by Greece's socialist government were "subject to further risks."

The problem? Rampant tax evasion is starving Greece's cash-strapped coffers of more than $30 billion a year -- a sum that would have gone a long way in easing the country's fiscal woes.

"There were quite modest expectations for what anti-tax-evasion measures would contribute," said Sarah Carlson, Moody's lead analyst for Greece. "But even so, the increase in 2010 fell well short of expectations."

The credit agency also cast doubt on the ability of George Papandreou's government to deliver on its austerity program, including reforming a wasteful health care system and pressing ahead with the privatization of money-losing state companies.

"The sheer magnitude of the task becomes ever more apparent," Carlson said, raising the specter of default as international investors remained skittish about Greece's chances of repaying its debts.

Athens officials conceded they were familiar with the credit agency's plan to downgrade Greece's debt ratings. Still, they said, they were surprised by the three-notch slash and its timing.

The Finance Ministry billed the move "completely unjustified" and "incomprehensible," challenging even the agency's motives and credibility ahead of a crucial March 24-25 European summit in Hungary, at which the 17 eurozone governments plan to discuss how Germany and other core eurozone nations may fund a permanent and larger financial safety net for weaker partners, including Greece, Ireland and Portugal.

Analysts say it's unlikely that any deal to arise will be comprehensive enough to end market concerns about European sovereign debt. Still, Greece and Ireland hope to win concessions on the terms of their bailouts, especially a less punitive interest rate.

As the government railed against Moody's, financial experts saw a silver lining to the downgrade.

"It may, in fact, pressure eurozone leaders to ease terms of the bailout loan, given that it's not
producing the results that were anticipated," said Panayiotis Petrakis, professor of economics at Athens University.

It remains unclear whether eurozone leaders will in exchange pressure Greece to restructure its debt, which is expected to reach a staggering 158 percent of the country's gross domestic product in 2013, when its three-year bailout plan expires.

Borrowing needs between 2013 and 2015 are expected to reach $300 billion, a sum that experts believe is unsustainable for a troubled economy.

To reduce that debt rate by 20 percentage points, Greece has set out to design an ambitious privatization program intended to raise more than $60 billion. The question is whether investors will want to buy assets in a country that has yet to root out the fiscal indiscipline, economic mismanagement and grave weakness in public administration that contributed to the Greek crisis in the first place.