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Moody’s Warns of Greece Cut If Fiscal Plan Missed

Feb. 25 (Bloomberg) — Greece’s debt rating may be cut within months unless the country meets the objectives of its plan to reduce the European Union’s largest budget deficit, Moody’s Investors Service said.

“If the deviation is significant, we may even indeed downgrade by a couple of notches,” Pierre Cailleteau, managing director of sovereign risk at Moody’s, said in an interview in Tokyo today. Standard & Poor’s said yesterday it may lower the rating by the end of March as a weak economy and political opposition threaten the country’s ability to cut the deficit.

The euro slumped to a one-year low against the yen, Asian stocks dropped and the cost to protect against a default of Greek government bonds climbed on concern that the country may need the EU’s assistance to avoid missing debt payments. Unions yesterday staged a strike to resist Prime Minister George Papandreou’s drive to cut the budget shortfall.

“If in a few months it appears there are significant deviations from the plan, then it is pretty likely that we would adjust the rating accordingly,” Cailleteau said. At the same time, he said, Moody’s may stabilize the A2 rating should Greece follow through with its austerity measures.

“We have to let the government implement its plans,” Cailleteau said. “You can’t expect a government to be able to turn around public finances in a few days.”

He said Greece’s fiscal position is unchanged from December, when Moody’s cut the debt rating to the current level. Moody’s rating of Greece is the sixth highest, two notches above the BBB+ held by Standard & Poor’s and Fitch Ratings.

Difficult to Borrow

If Moody’s cuts its credit rating to the same level as the other major ratings companies it could exacerbate Greece’s financial distress at the end of this year when the European Central Bank is due to revert to old collateral rules that were loosened during the global recession. Greek government bonds would then no longer be eligible as collateral at the ECB, making it more difficult for the nation to borrow.

Concern about Greece’s ability to finance its deficit and debt have roiled financial markets since the government revealed it had a budget shortfall of 12.7 percent last year, more than four times the limit allowed for countries using the euro, and the highest ratio in the 27-nation European Union.

The euro slumped 1.1 percent to 120.73 yen as of 3:04 p.m. in Tokyo after earlier falling to 120.46, the weakest since Feb. 24, 2009. The 16-nation currency slid 0.5 percent versus the dollar to $1.3467.

Credit Default Swaps

Credit-default swaps protecting the debt of Greece were quoted 10 basis points higher at 375 basis points, according to Royal Bank of Scotland Group Plc prices. The contracts have risen 19 basis points this week, according to prices from CMA DataVision in New York.

The premium investors demand to hold Greece’s 10-year securities instead of Germany’s rose to the most in more than two weeks. The yield differential between 10-year German and Greek bonds expanded to 3.39 percentage points today from 3.32 percentage points yesterday, according to data compiled by Bloomberg. The gap reached 3.96 percentage points on Jan. 28, the widest since October 1998.

“We believe that a further downgrade of Greece of one to two notches is possible within a month,” S&P analysts led by Marko Mrsnik in London said in a statement released yesterday.

EU governments are looking for guarantees that Papandreou will slash spending before they spell out what help they may offer. EU and European Central Bank officials are in Athens this week to verify that budget cuts are being implemented.

Additional Measures

Under proposals adopted this month by euro-area finance ministers, the Greek government will have to take additional measures to cut its budget gap if it fails to satisfy the European Commission next month that its current strategy is on track. These may include higher value-added tax, a levy on luxury goods, higher energy taxes and spending cuts, they said.

Cailleteau also said in a speech after the interview that Aaa-rated countries are “losing altitude.” U.S. deficits are reducing the nation’s buffer from shocks, he said.

Moody’s said this month the U.S. government’s Aaa bond rating will come under pressure in the future unless additional measures are taken to reduce budget deficits. The country is facing an unprecedented $1.6 trillion budget deficit in the year ending Sept. 30, the government has forecast.