Colin Barr

Following the money in banking, economics, and Washington

Moody's downgrades Greece again

June 1, 2011: 3:41 PM ET

The Greek comedy took another twist Wednesday.

Moody's downgraded Greece again, putting 50-50 odds on a default thanks to the country's strapped finances and tortured European politics.

The rating agency cut Greece's rating to Caa1, its third-lowest rating, and kept its outlook negative, meaning another downgrade could come soon. Moody's cited rising chances that the country won't stabilize its debt burden, which has been getting heavier as borrowings rise and the economy shrinks. It also blamed Greece's "highly uncertain growth prospects."

The decision is the latest recognition of the fact that the Greek government won't be able to pay its bills unless it rips up some of the 300 billion-plus euros of IOUs it has issued. That would mean forcing investors to share some of the pain being borne by Greek taxpayers, on the occasions they can be located.

The market has caught onto this view, with two-year Greek bonds trading at yields as high as 25% in recent days. The bailout package adopted last year would force the Greeks to come back to market for more funds over the next year, which now looks impossibly costly.

But the money is going to have to come from somewhere. The Greek budget deficit has been growing even as the country adopts austerity measures aimed at curbing government spending – which is why Moody's and others have been warning for some time about the need for a debt restructuring. Moody's downgraded Greece in March and said last month another might be on the way.

Yet as ominous as the drumbeat out of Europe is, there is some reason to believe the dancing will go on for a bit. "Moody's does not believe that a restructuring of Greece's debt is inevitable," the rating agency says. "This is because a default in the short term would very likely be highly destabilizing, and the full impact on Europe's capital markets would be hard to predict and harder still to control."

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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