December 16, 2009 / 5:57 PM / 9 years ago

UPDATE 2-S&P cuts Greece ratings, warns of further downgrade

(Adds reaction from EU’s Barroso, background)

By Walter Brandimarte and Harry Papachristou

NEW YORK/ATHENS, Dec 16 (Reuters) - Standard & Poor’s on Wednesday cut Greece’s credit ratings by one notch, saying another downgrade is possible if the government fails to gain political support for a fiscal consolidation program.

S&P’s decision follows a similar move by Fitch Ratings last week, which raised investors’ concerns about the fiscal situation of the eurozone as a whole.

S&P said in a statement it decided to downgrade Greece because its recently announced fiscal measures are unlikely to lead to a “sustainable” reduction the the public debt burden.

“We believe that the government’s efforts to reform the public finances face domestic obstacles that would likely require sustained efforts over a number of years to overcome,” S&P said.

The ratings agency cut Greece’s ratings to BBB-plus from A-minus and left the new rating on “creditwatch” negative.

The euro suffered little impact from the S&P news, though, as investors were already expecting the agency to cut Greece’s ratings.

“It is critically important that Greece now implements the measures (it) has announced,” President of the European Commission Jose Manuel Barroso told CNBC in an interview when asked about the downgrade.

The euro EUR= was up 0.06 percent at $1.4542 right after the S&P decision.

S&P’s downgrade on Greece is the second by a major ratings agency this month after Fitch last week also cut its rating on the indebted country to BBB+ from A-., leading to a sell-off in Greek government bonds and banking stocks.

“The downgrade will increase concerns that Greek banks will no longer be able to use government bonds as collateral to obtain funds from the ECB when the Bank’s rules re-tighten in a year’s time,” said Jonathan Loynes, chief European economist at Capital Economics.

Although it is doubtful the European Central Bank would stop supporting Greek banks while they remain heavily dependent on finance, the downgrade adds more pressure on Greece to improve its finances in a supplementary budget next year, Loynes said. (Additional reporting by Renee Maltezou and Harry Papachristou; Editing by Andy Bruce)

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