Greece slips further into junk bond territory

In a further humiliation and a powerful indicator of fast evaporating international confidence the Standard and Poor's credit ratings agency has pushed Greek government bonds further into "junk" territory with a downgrade from BB- to B.

For an advanced economy and – still – a member of the eurozone, Greece now keeps company with the likes of Argentina, Bolivia, Burkina Faso, Cameroon, Dominican Republic, Ghana, Honduras and Lebanon, none a byword for fiscal rectitude.

While Greece's league table ranking is embarrassing, of rather more interest to investors, including the pension funds, banks and other holders of Greek debt – not least the European Central Bank, is the prediction by S&P of a "haircut" of between 50 and 70 per cent in the value of the face value of their Greek investments, rather more than has previously been assumed.

"We have a recovery rating on Greece which is 4, which implies that under a default scenario we would expect a haircut of between 50 and 70 per cent," Frank Gill, a S&P senior director for European sovereign ratings, said.

Such a radical "restructuring" of Greek debt is now regarded as inevitable by the markets, with the usual assumption it will come about by early next year, when the present IMF/EU funded rescue package begins to run out of money. Greece faces a funding shortfall of nearly €30bn in 2012 and is locked out of markets – yields of 20 per cent are being demanded for two-year money.

Speculation about Greece's future has been ramped over the weekend by a well-publicised but supposedly "secret" meeting of eurozone finance ministers in Luxembourg.

Speculation that the German government is now prepared to countenance a restructuring (technically a default) in preference to never-ending financial assistance to Athens has also undermined confidence that Greece can make it. Talk has also been growing about Greece leaving the eurozone – though that is much less likely than some postponement of the repayment of her debts, a reduction in the interest she pays on them, or the eurozone buying them.

Any such moves might spark another wave of "contagion" fever across the Continent, with Ireland and Portugal once again being dragged into crisis and, possibly Spain, which has so far managed to slip away from the panic.

The issue will be discussed again at the next meeting of EU finance ministers on 16 and 17 May. For now, analysts agree, the most likely outcome is that policymakers will agree to provide Greece with additional funds within the eurozone and perhaps to extend the maturity of its existing bailout loans, in effect postponing a Greek restructuring.