Fitch Ratings downgraded debt-stricken Greece today to the lowest possible investment grade, piling pressure on a eurozone member that is struggling to avoid bankruptcy.
The two-notch cut put Greece on a par with countries ranging from Croatia and Kazakhstan and just a whisker away from speculative "junk" status that would severely limit the type of investors able to hold its debt.
Fitch said it had cut Greece's ratings to BBB-minus from BBB-plus with a negative outlook and signaled more downgrades were possible. It added that it saw Athens tapping an external support mechanism agreed last month by eurozone leaders.
"The downgrade reflects the intensification of fiscal challenges in response to more adverse prospects for economic growth and increased interest costs," Fitch said.
"It also reflects ongoing uncertainties about the government's financing strategy in the context of increased capital market volatility."
The risk premium on Greek 10-year bonds over benchmark German bunds widened by over 10 basis points to 412 after the announcement. The spread had hit a euro era record of 463 earlier this week.
The downgrade follows moves by ratings agencies Standard & Poor's and Moody's cut Greece to BBB+ and A2 in December.
Markets have punished Greek assets - particularly state bonds and banking stocks - since Athens revealed last year the 2009 budget deficit was twice more than previously expected at more than 12 percent of gross domestic product.
The socialist-led government has since pledged to slash that by a third by pruning state wages, freezing pensions, and raising taxes - measures that may slow the fiscal deterioration over the long term but are expected to hit growth and budget revenues this year.
The doubts have prompted investors to drive Greek borrowing costs to more than double those of eurozone stalwart Germany to roughly 7 per cent, a borrowing cost the government says is not sustainable for long.
"The sharp rise in interest rates faced by the government this year, in combination with a deterioration in the outlook for economic growth, will make it harder for the government to achieve its fiscal targets of reducing the deficit to 8.7 percent of GDP this year and ensuring that public debt peaks at just over 120 percent of GDP in 2010 and 2011," Fitch said.
Eurozone leaders have agreed on a possible safety net that would include support from the International Monetary Fund.
But Fitch said a lack of clarity on the deal's details - a factor also mentioned by investors betting against Greece - may have hindered Greece's access to markets and hurt its chances of meeting its fiscal targets.
"While Fitch judges that external financial support is likely to be forthcoming, greater clarity on back-stop financial support in the form of an explicit IMF programme is likely to be required to shore up market confidence in the face of still substantial near-term financing needs," it said.
Last month, S&P affirmed Greece's BBB+ rating but warned it was still at risk of a rating cut within the next 18-24 months if it failed to implement its deficit cutting plan.