An increasingly desperate Greece has been slammed with another deep cut in its credit rating as its European partners scramble to avert a messy debt restructuring that seems all but inevitable.
Standard & Poor's cut its rating on Greece's debt another two notches to single-B, deep in the land of speculative bonds, where it joins the likes of Lebanon and former Soviet satellites Belarus and Georgia. Greek bonds are now considered slightly less safe than debt issued by such small emerging countries as Senegal, Zambia and Gabon.
Rival debt monitor Moody's put Greece's rating on review for a possible further reduction, stemming from the "increased uncertainty about the sustainability" of its debt.
The fresh warnings underscore the failure of European efforts to bail the country out of its worsening fiscal crisis and raises the spectre of a debt restructuring that would send shock waves throughout the 17-country euro area.
The agency actions came in the wake of published rumours on Friday that euro zone finance ministers were meeting in secret in Luxembourg to talk about a possible exit by Greece from the monetary union. European Union officials and Greek politicians angrily denied any such plan was on the table.
But after the meeting, officials conceded publicly for the first time that the €110-billion bailout ($152-billion) will have to be revised, because Greece plainly cannot meet the EU's conditions. These include raising €25-billion to €30-billion in the market next year to cover debt repayments.
"We think that Greece does need a further adjustment program," Jean-Claude Juncker, the Prime Minister of Luxembourg and chairman of the EU finance ministers' group grappling with the crisis, declared after the meeting.
The revamped deal is expected to involve lower interest rates and extended repayment terms, which amounts to a form of restructuring. The rating agencies and other analysts suspect that bondholders will be asked to accept similar conditions.
"The downgrade reflects our view of increasing sentiment among Greece's key euro zone official creditors to extend the debt payment maturities of their €80-billion of bilateral loans pooled by the European Commission," Standard & Poor's said.
"As part of such an extension, we believe the euro zone creditor governments would likely seek 'comparability of treatment' from commercial creditors in the form of their similarly extending bond and loan maturities."
As in the past, Athens responded angrily to the rating actions, calling them unjustified. But the latest in a string of warnings and downgrades came as no surprise in a market that already treats Greek bonds as high-risk junk and is demanding huge risk premiums to hold it. The yield on Greece's benchmark 10-year bond climbed Monday to 12.6 percentage points above comparable German bonds. The cost of insuring the debt against default, a figure closely watched by the market, jumped to a record 1,375 basis points. (A basis point is 1/100th of a percentage point.)
"Credit default swaps are traded without any transparency and are threatening to bring down entire countries and entire societies," Greek Prime Minister George Papandreou fumed Monday, accusing investors of "betting on our bankruptcy and the breakup of the euro. But their effort is in vain."
A restructuring, which would force bondholders to take losses, may not happen as quickly as the soaring bond yields suggest. Greece may instead be close to getting fresh bailout loans.
UBS strategist Katherine Klingensmith and analyst Thomas Wacker said in a note that "enhanced support for Greece is necessary" because the International Monetary Fund, which was the co-sponsor of the country's bailout a year ago, is likely to conclude that Athens has not met its debt-consolidation commitments.
To get new loans, UBS thinks the Greek government would have to pledge collateral, perhaps in the form of assets, such as infrastructure, that it intends to privatize. Greece would argue for more lenient terms, such as lower interest rates or an extended repayment schedule.
"Ultimately, this would not solve the underlying Greek problem," the UBS analysts said. "However, it would buy more time to prepare other countries and European banks for a Greek debt restructuring, which we think is inevitable."
The Portuguese government, also hit by a rash of downgrades and soaring debt-financing costs, has gone beyond public expressions of outrage. The Attorney-General's office is investigating a complaint by four economists about the rating agencies' actions.
John Chambers, chairman of S&P's sovereign ratings committee, told Bloomberg Television that he was not familiar with details of the complaint and declined to comment further. Spokespersons from Fitch and Moody's were unavailable for comment.
The fact is, though, that investors have no appetite for any new debt from Greece, Portugal or Ireland, all of which have received large bailouts from their European partners and the International Monetary Fund.
"There is always a danger that downgrades will only further weaken demands for Greek debt already out there, but I can't imagine who still holds Greek debt because they are filling some quota in their portfolio," said Marko Papic, senior European analyst with Stratfor, a global intelligence firm based in Austin, Tex.
Insolvent Greece owes more money than it can plausibly raise through taxes or other revenue sources, said prominent U.S. money manager Rob Arnott, chairman of Research Affiliates in Newport Beach, Calif.
"The whole discussion about whether Greece can avoid default or not is misplaced. The real question is when does it default, what is the nature of that default and how are the ripple effects mitigated. And that's all that's going on right now."
With files from reporter Eric Reguly in Rome