Moody's: Greece and Portugal still at risk

By Annalyn Censky, staff reporter


NEW YORK (CNNMoney.com) -- A day after European leaders agreed on a $900 billion rescue package, credit rating agency Moody's cautioned investors that two of the euro zone's hardest hit countries aren't out of the woods just yet.

In the last month, Moody's has said several times that debt-strapped Greece and Portugal are under review for future downgrades to their credit ratings. But in a report to investors Monday, the agency said those downgrades could occur within a month.

Greece's downgrade would probably be more "substantial" than previously indicated, with cuts to the Baa range, or just above junk status, the report said.

"This will depend on developments in the Greek economy once the fog of financial panic, support-mobilisation and street demonstrations dissipates," Moody's wrote. "The country's debt is large but not unbearable; however, the required adjustment is obviously very painful, and short-term economic prospects are clearly dismal."

Portugal's possible downgrade is less severe than that of Greece, as Moody's said it is considering a one-notch cut to Aa3 from Aa2. Both ratings are so-called investment grade and considered relatively low risk.

Both reviews will be decided on within the next four weeks, Moody's said.

Last month, Moody's cut the rating on Greece's government bonds down one notch to A3 -- still an investment grade, although not an entirely high-quality, level. At the time, Moody's cautioned that further downgrades were possible as it continues to review Greece's economic outlook.

Credit ratings are used by investors to evaluate the risk of a default on government bonds. The yield on Greek bonds recently soared to record highs, as investors worried that the country could default on its debt. Another cut to Greece's credit rating could fan the flames of investors' fears, making it even more difficult for the country to sell bonds.

In its report on Monday, Moody's said it also has a negative outlook for Ireland, which is struggling with debt but has greater economic and institutional strength than some of the beleaguered countries in Europe's "southern periphery."

On April 27, another credit rating agency, S&P slashed Greece's rating to junk status and a day later, it cut Spain's rating to a low-rung investment grade. To top of page

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