S&P cuts Greece's outlook to negative

Last updated 12:27 08/08/2012

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Standard & Poor's Ratings Services has lowered its outlook on Greece's long-term credit rating, saying that the financially troubled nation will likely need further aid from its international lenders amid a worsening economy and delays implementing harsh austerity measures.

The ratings firm downgraded Greece's long-term sovereign credit rating outlook to "negative" from "stable." Its rating remained at "CCC," well into "junk" status.

Greece's economy is worsening, so it will likely need as much as €7 billion (NZ$10.6b) in additional financing, or 3.7 per cent of its gross domestic product, from the European Union and the International Monetary Fund, S&P said.

The move to lower the outlook reflects the possibility that S&P will downgrade Greece's rating if the nation fails to get additional funding from other eurozone countries and the IMF.

The country has been relying on such loans since high interest rates pushed it out of bond markets in 2010. In return, it has imposed harsh austerity, slashing pensions and salaries, repeatedly hiking taxes and increasing the retirement age.

The firm projects that Greece's gross domestic product will shrink by 10 or 11 per cent over this year and next. The European Union and IMF have assumed GDP will slow only between 4 percent and 5 percent during that period.

Greece has received two bailouts totalling €240 billion from other eurozone governments and the International Monetary Fund after bond investors would no longer lend it money at affordable rates. In return for the money, Greece is supposed to cut its budget deficit and reform its economy. However, the economy has continued to contract and the new government of Prime Minister Antonis Samaras has said it wants more time to meet some of the conditions.

Even so, S&P anticipates that Greece's government will find it difficult to make the additional cuts required to satisfy the conditions to get its next slate of funding from the EU and IMF.

"We see the likelihood of shortfalls, owing to election-related delays in the implementation of budgetary consolidation measures for the current year, as well as the worsening trajectory of the Greek economy," S&P said.

A cutoff of bailout money could lead to Greece defaulting on its remaining obligations and possibly leaving the euro currency.

International bailout creditors are closely scrutinising the country's lagging austerity and reform program, and a negative report next month would likely lead to the vital rescue loans being halted. That would leave the government unable to pay pensions, salaries and service its debts, which in turn could force Greece to leave the 17-member eurozone, a move that would reverberate throughout global financial markets.

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- AP

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