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Moody's reduces status of Greek debt to junk

Greece's credit rating was cut four steps on Monday to junk status, or non-investment grade, by Moody's Investors Service, which cited the country's economic "risks."

Greece's credit rating was cut four steps on Monday to junk status, or non-investment grade, by Moody's Investors Service, which cited the country's economic "risks."

The downgrade was a new blow to the debt-ridden country, which is under intense international scrutiny after narrowly avoiding default last month.

The rating was lowered to Ba1 from A3, Moody's said in a statement. While the outlook for Greece is stable for the next 12 to 18 months, the rating firm said, the change "incorporates a greater, albeit, low risk of default" on the country's debt. A lower credit rating increases the cost of borrowing money.

Greece, whose bonds have been designated junk by ratings firm Standard & Poor's Corp., since April, last month agreed to a package of additional austerity measures to qualify for financial aid from the European Union and the International Monetary Fund. The downgrades by Moody's and S&P mark the first time a euro member has lost its investment-grade status since the launch of the currency in 1999.

After that $134.5 billion Greek lifeline failed to contain the fiscal crisis, the EU announced a $965 billion backstop to shore up the finances of the region's weakest economies amid concern governments will struggle to tackle their budget deficits.

The turmoil has prompted investors to sell the bonds of Greece, Spain and Portugal and pushed the euro down 15 percent this year.

"This doesn't look good, and I expect another round of sell-off," said Christoph Rieger, of Commerzbank AG in Frankfurt, Germany's second largest bank. "A junk status means it will fall out of some benchmark indices. People who use those benchmarks are likely to sell."

The government said the downgrade by Moody's doesn't reflect the progress it has made in reining in its deficit. The package announced by Prime Minister George Papandreou includes wage and pension cuts and tax increases that have prompted street protests and strikes.

Greece got in trouble by amassing a vast public debt and overspending that sent its budget deficit spiraling to 13.6 percent of the total economy, or gross domestic product, in 2009. In return for the bailout, Greece pledged to bring the deficit to 2.6 percent of GDP by 2014.

"The Greek government remains absolutely committed to the task of fiscal adjustment and improving the country's growth prospects," the country's Finance Ministry said in a statement.

But Moody's said, "There is considerable uncertainty surrounding the timing and impact of these measures on the country's economic growth," Sarah Carlson, vice president-senior analyst in Moody's sovereign risk group, said in the statement.