Rating agency Standard and Poor's slashed Greek debt to junk status today and also downgraded Portugal, as investors worried that political pressures could block a multi-billion euro bail-out of Greece.
Markets in Europe and the US tumbled in reaction to signs that the Greek debt crisis was spreading to other highly indebted euro zone states. The euro fell back near a one-year low against the US dollar.
There were reports tonight that European leaders are set to meet in Brussels on May 10 in a bid to agree a 30 billion rescue package for Greece. Greece has stressed that it needs the money by May 19 at the latest in order to remain solvent.
The date is significant because it falls the day after a key German regional election seen as a significant obstacle for Chancellor Angela Merkel, the biggest potential contributor to the Greek bail-out.
The interest rate demanded by investors to lend money to Greece soared. There is panic among some investors who fear they will lose some of their money if Greece restructures or defaults on its debt.
S&P cut its rating of Greek government debt by a full three notches to BB-plus, the first level of speculative status. The outlook is negative, meaning the agency could downgrade Greece again.
The downgrade put Greece on par with Romania and below Kazakhstan, Hungary and Iceland, the last of which rocked global markets when its main banks imploded at the start of the global financial crisis.
S&P cited the 'political, economic, and budgetary challenges that the Greek government faces in its efforts to put the public debt burden onto a sustained downward trajectory.'
It assigned a recovery rating of '4' to Greece's debt, indicating it expected an 'average' recovery of between 30% and 50% for holders in the event of a Greek restructuring or default.
S & P downgraded Portugal's sovereign debt by two notches and said the outlook was negative due to the country's fiscal and economic weaknesses.
S&P said it cut Portugal's long-term credit rating to A- from A+ and its short-term rating to A-2 from A-1.
Greek finance minister warns of 'lack of clarity'
Greece's finance minister has warned that the country is struggling to deal with its debt crisis due to what he called an 'unhelpful' political situation in Europe marked by 'a lack of clarity'.
Greece is talking to the EU and International Monetary Fund about activating a €45 billion rescue package.
Finance minister George Papaconstantinou said Greece needed money by May 19 to pay maturing debt, adding that the country was 'unable' to access financial markets.
Mr Papaconstantinou also warned that the Greece's budget deficit for 2009 - already revised up to 13.6% of GDP by the EU - could eventually end up at 14%.
This came after Germany's junior coalition party said Germany was not certain to put its weight behind a financial rescue. Market pressure on Greece has intensified since it asked for emergency help on Friday.
German aid 'not guaranteed'
Chancellor Angela Merkel said yesterday that Germany was willing to help Greece if it showed a readiness to enact new savings and put its economy back on a sustainable path.
But the budget spokesman for Germany's junior coalition partner, the Free Democrats (FDP), said a contribution to the rescue from Germany was not yet guaranteed.
'One may have to say no if Greece does not meet conditions and the country just comes along to get money under more favourable terms from the euro zone than from banks,' Juergen Koppelin said.
The backing of Germany, Europe's biggest economy, is vital for any rescue but Merkel believes her party is vulnerable to losing a regional election on May 9, depriving her coalition government of its majority in the upper house of parliament.
She wants to reassure financial markets and protect the euro but is also taking a tough line on the terms of the deal because of German public resistance to aid for Greece, and this has heightened investor uncertainty.
The head of Greece's central bank sought to address the country's credibility problem by suggesting it would try to reduce its budget deficit by five percentage points of GDP or more this year, above current plans.
The government has so far proposed cutting four percentage points off the budget deficit, which was revised upwards to 13.6% of gross domestic product for last year by EU statistics agency Eurostat this month.
Earlier, the Bank of Greece also warned that the country's recession was likely to be deeper than feared this year.
