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A visitor admires the temple of the Parthenon in Athens - Source: Reuters
Greece has been jolted by the downgrading of its debt rating to the lowest level in the euro zone as worries grow about its public finances, driving bank shares, bonds and the euro down in its wake.
The financial blow came as the government struggled to calm two days of youth riots on the anniversary of the police shooting of a 15-year-old boy last year that triggered widespread violence fuelled by anger over the economy.
Citing a fiscal deterioration, Fitch Ratings cut Greek debt to BBB+ with a negative outlook, the first time in 10 years a major ratings agency has put Greece below an A grade.
Two other agencies, Moody's and Standard and Poor's, have put its credit outlook on negative watch due to a debt mountain forecast to hit 125% of gross domestic product next year, making it proportionately the most indebted member of the 16-member currency bloc.
Finance Minister George Papaconstantinou said in a statement that the Socialist government would do everything in its power to narrow the yawning budget shortfall it inherited after a general election in October.
"We will do whatever it takes for the reduction of the deficit in the mid-term," he vowed.
The European Union, exasperated by repeated sharp revisions of Greek statistics, has given Athens a few weeks to come up with further deficit-cutting steps or face possible sanctions.
Papaconstantinou has pledged to reduce the budget gap, forecast to reach 12.7% of GDP, by at least 3.6 percentage points to 9.1% in 2010. But markets doubt the government, elected on a promise to help the poor and tax the rich, can push through painful spending cuts.
Greek police fired teargas at hundreds of rioting youths on Monday after some 5,000 students, workers and leftists marched on parliament. Anarchists planned another protest late on Tuesday.
Although Greece has suffered a milder recession than many euro zone countries, it faces long-term problems of low growth, dwindling economic competitiveness, poor revenue collection and an ageing population.
Pressure mounting
"The pressure for the government to do something bolder is
definitely mounting because all European institutions and ratings
agencies are definitely sending messages to Greece that the
situation is unsustainable," Citigroup economist Giada Giani
said.
The euro extended losses to hit a day's low, while bund futures hit
a one-week high and Greek bank shares' falls on the day reached
almost 8% after the Fitch statement on Tuesday.
The premium investors demand to hold 10-year Greek government bonds rather than euro zone benchmark German Bunds rose to around 230 basis points, its widest since April 21.
Jean-Claude Juncker, who chairs the Eurogroup of euro zone finance ministers, said last week that Greece faced no risk of bankruptcy, and European Central Bank President Jean-Claude Trichet said he was confident the government would take the necessary "very difficult, very courageous" measures.
Fitch said in a statement the downgrade "reflects concerns over the medium-term outlook for public finances given the weak credibility of fiscal institutions and the policy framework in Greece, exacerbated by uncertainty over the prospects for a balanced and sustained economic recovery".
Markets' broader concerns are that deeper troubles for Greece would also throw the spotlight on other euro zone borrowers such as Ireland, Portugal and Spain which have been hit hard by the financial crisis.
"Fiscal slippage relative to current plans could result in a further downgrade, while the emergence of a much stronger policy commitment and its consistent implementation could see the outlook revised to Stable," Fitch said in the statement.
The downgrade could make it harder in the long term for Greek banks to use government bonds as collateral to borrow funds from the ECB, although Greek central bank governor George Provopoulos said there was a "safe distance" before any collateral problems would arise.
Greece makes up about 2.5% of euro zone economy. But RBS calculates that Greek banks account for about 7% of outstanding ECB liquidity, making Greek banks the second most dependent on ECB funds after Ireland.
