Credit rating on 5 Greek banks downgraded by Moody’s amid national debt crisis

Moody’s downgrades Greek banks, long slump feared

ATHENS, Greece — Moody’s credit rating agency downgraded five Greek banks on Wednesday, saying their finances will suffer from the effects of the country’s public debt crisis — including painful austerity measures and a long recession.

The credit rating agency said the outlook on the banks — National Bank of Greece, EFG Eurobank Ergasias, Alpha Bank, Piraeus Bank and Emporiki Bank of Greece — remained negative, suggesting further downgrades are possible.

“Today’s rating actions were prompted by the country’s weakening macroeconomic outlook and its expected impact on these banks’ asset quality and earnings-generating capacity,” Moody’s Investor Services said in a statement. “Pressures on the macroeconomic fundamentals have been evident for the past year and are expected to intensify as the year unfolds.”

Greece has been gripped by a financial crisis since late last year, when the newly elected Socialist government drastically revised its projected budget deficit for 2009 to 12.7 percent from previous estimates earlier that year of below 4 percent.

The government has announced a series of harsh austerity measures to bring its debt under control, including cutting civil servants’ pay, hiking taxes and freezing pensions.

But the loss of market confidence has left the country facing high borrowing costs that are about twice those of Germany’s.

“Although additional measures taken to address fiscal imbalances at the national level may have a positive impact over the longer term, Greece’s fiscal challenges will weigh negatively on economic growth over the short to medium term,” Moody’s said.

It added that recession in Greece is likely to lead to higher unemployment, lower consumer spending and reduced profitability for small and medium sized enterprises.

“Moody’s expects the upward trend in non-performing loans, which began in 2008, to continue in 2010 and, possibly, 2011. Combined, these factors will place additional pressure on the banking sector’s already weakened asset quality and profitability.”

Greece’s borrowing costs remain high despite an agreement reached in Brussels last week to rescue the country if it finds itself unable to pay its debt or borrow on the market.

Athens hopes the plan, in which the 16 eurozone countries promised loans together with funding from the International Monetary Fund to assist Greece, will help restore market confidence and bring down borrowing costs.

But the rescue plan could only be used as a last resort and it requires unanimity from all 16 eurozone countries — and the markets so far appear unconvinced.

The interest rate gap, or spread, between Greek 10-year bonds and equivalent German issues — considered a benchmark of solidity — climbed to 3.43 percentage points on Wednesday from 3.06 points on Monday. A wider spread means weaker confidence in a country’s debt as investors demand a higher risk premium to hold it.

The spread translates to a borrowing cost for Greece that is roughly twice that of Germany’s, and one that the government has said is unsustainable.

However, European Central Bank President Jean-Claude Trichet said in Stockholm Wednesday that he expected market confidence in Greece to gradually increase.

Trichet said he expects “the credibility of these measures will be progressively recognized by all market participants.”

Greece on Tuesday sold euro390 million though the reopening of a 5.9 percent bond that comes due on Oct. 22, 2022. The Public Debt Management Agency had said it had been seeking to raise up to euro1 billion in the sale, which came a day a day after the country raised euro5 billion with a seven-year bond issue.

Finance Minister George Papaconstantinou said the fact that the seven-year bond had an interest rate of below 6 percent was “a significant improvement.” The country had raised euro5 billion from a 10-year bond issue in early March at an interest rate of about 6.4 percent.

Each time Greece goes to the market, “it borrows at a lower interest rate than the previous time,” Papaconstantinou said during a discussion in Parliament on tax reforms. “And this happens because this government has taken difficult measures which are recognized internationally … and this allows for the gradual reduction of borrowing costs.”

He acknowledged that “our country continues to borrow at an interest rate that is higher than we would like,” but insisted “there will be a reduction of interest rates and it will be related to how well the measures this government has taken are being implemented.”

In Moody’s report, the rating for the National Bank of Greece was downgraded to A2 from A1, EFG Eurobank Ergasias to A3/Prime-2 from A2/Prime-1, Alpha Bank to A3/Prime-2 from A2/Prime-1 and Piraeus Bank to Baa1/Prime-2 from A2/Prime-1). Emporiki Bank of Greece’s deposit and debt ratings were downgraded to A3/Prime-2 from A2/Prime-1, it said.

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Associated Press writer Louise Nordstrom in Stockholm contributed.