Another downgrade leaves Greek debt one level above junk
GREECE suffered a further downgrade of its credit rating yesterday, leaving its debt one notch above junk status.
The revision by Fitch, one of the big three rating agencies, came as markets sensed that Athens would need to call for a bailout soon and European Union officials working behind the scenes finalised the terms of a rescue plan.
Greece must refinance €11bn of debt in May, officials said, making a bailout seem all but inevitable after a week in which markets pushed up the cost of Greek bonds despite the agreement of EU leaders in March on a joint bailout mechanism with the International Monetary Fund (IMF).
Fitch's downgrade probably put up the price of a rescue for Athens because it would have to be provided at a rate appropriate for the new BBB- status.
There was more bad news for Greece yesterday when figures showed that industrial output fell by 9.2pc year-on-year, while inflation rose to 3.9pc.
The Greek economy is forecast to contract by 2pc this year after a similar fall in 2009, but some economists now expect the decline to be even sharper.
EU sources said the eurozone's proposed rescue package would be on "normal IMF terms", with the IMF providing initial funds through bridging loans, while individual European nations won parliamentary approval for bilateral loans.
A simple European Central Bank loan is not possible under EU rules, which have a "no-bailout" clause.
Yesterday, Bulgaria delayed plans to join the single currency after admitting that, like Greece, it had issued misleading figures for its 2009 deficit. It was actually 3.7pc, not 1.9pc, it said.
Meanwhile, Germany restated its opposition to below-market rate loans to Greece as officials in Brussels hammered out details to the framework calling for joint EU-IMF aid.
"They have to be given some help from Europe or the IMF at concessional rates," billionaire investor George Soros said.
"It is a make or break time for the euro and it's a question whether the political will to hold Europe together is there or not."
The premium investors demand to buy Greek 10-year bonds instead of German bunds jumped to 442 basis points, the highest since the introduction of the euro.
Greek Prime Minister George Papandreou has said borrowing at those levels is unsustainable.
Greece would need to seek emergency funding now to make debt repayments of more than €20bn in the next two months, UBS economists said in a note.
"The recent market action means that an external intervention may be unavoidable and could happen very soon as the situation is untenable," UBS economists including Stephane Deo wrote. "An intervention over the weekend is a distinct possibility."
See Newsmaker: George Papandreou, page 37