Moody’s Downgrades Greece’s Debt Rating to A2

Moody’s Investors Service (MCO) cut Greece’s rating to A2 from A1 on Tuesday, sparking a rally in its bonds as investors responded with relief that the latest downgrade was not more severe. The markets had feared a two-notch cut.

It was the third rating agency to downgrade Greek government bonds, citing the country’s swelling budget deficit, after Fitch downgraded Greece from A- to BBB+ on Dec.8 and S&P downgraded it from A- to BBB+ on Dec. 16.

Moody’s said in a statement the new rating carries a ‘negative’ outlook, meaning that despite efforts by the country’ newly elected government to slash public spending, the rating agency it’s more inclined to cut Greece’s rating again, bringing it in line with the other major ratings agencies.

But Moody’s also made clear it saw little chance of a near-term financing crisis in Greece.

Bloomberg: “Greece is extremely unlikely to face short-term liquidity or refinancing problems unless the ECB decides to take the unusual step of making the sovereign debt of a member state ineligible as collateral for bank repurchase operations,” Arnaud Mares, a senior vice president at Moody’s in London, said in a statement. It’s a “risk that we consider very remote.”

Despite Tuesday’s cut, Moody’s still rates Greece higher than does Standard and Poor’s and Fitch, which for the time being remain skeptical on Greece’s ability to reduce its massive $440 billion public debt.

Greek Finance Minister George Papaconstantinou believes the main problem is more the credibility issue.

CNBC: “In 2010 Greece will be doing the biggest correction in its deficit than any other country. Ireland’s will be going up so will the UK’s, France’s and Germany’s. But we are reducing ours by 4 percentage points [the government aims to cut it to 8.7% next year]. But up until now people aren’t believing we are willing and able to do it,” he said.

“Hopefully, the government will be changing that perception and will prove during the course of the year that it is willing and able to do it”, Papaconstantinou added.

Greece is set to become the eurozone’s most indebted nation next year with public debt projected at 121% of GDP.