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Greece Debt Crisis: Fitch Downgrades Country's Credit Rating

Fitch Downgrades Greece

NICHOLAS PAPHITIS   02/22/12 11:39 AM ET  AP

ATHENS, Greece — Greece scrambled Wednesday to push through a batch of emergency laws that will further cut incomes and state spending, a day after securing a new bailout and debt relief deal designed to stave off bankruptcy.

The new austerity measures demanded by creditors in return for the rescue loans follow two years of deepening misery, with the Greek economy in freefall, unemployment at a record high and the state of the public finances in worse shape than previously forecast.

More than 6,000 people protested peacefully outside Parliament in Athens against the new cutbacks.

On Tuesday, the 17-country eurozone approved Greece's second financial lifeline in less than two years, worth euro130 billion ($172 billion), and a euro107 billion ($141 billion) debt writedown by banks and other private holders of Greek bonds.

In response to the writedown agreement, Fitch downgraded Greece's credit rating further into junk status, from 'CCC' to 'C.'

The agency said a Greek default "is highly likely in the near term" and added that it would briefly consider placing Greece in "restrictive default" once the bond swap is completed – a warning it first issued in June.

Athens argues that the default rating would be a simple technicality, as the twin deals struck on Tuesday will allow the country to repay bonds maturing next month – thus avoiding a disorderly default – and remain in the common European currency it joined in 2001.

Even then, the price of salvation for ordinary Greeks is only just starting to sink in.

Legislation tabled in Parliament late Tuesday outlines a total euro3.2 billion ($4.2 billion) in extra budget cuts this year agreed by the Cabinet last week.

The measures include nearly euro400 million ($530 million) in cuts to already depleted pensions. Health and education spending will be reduced by more than euro170 million ($225 million), subsidies to the state health care system will be cut by euro500 million ($661 million), and health care spending on medicine will fall by euro570 million ($754 million). And some euro400 million ($529 million) will be lopped off defense spending – three quarters of which will come from purchases.

The draft law also drastically revises the 2012 budget, changing the government deficit target to 6.7 percent of gross domestic product from an initial forecast of 5.4 percent. Even worse, plans for a modest primary surplus – which excludes debt servicing costs – have been scrapped and Greece will instead post a primary deficit of nearly euro500 million ($661 million), or 0.2 percent of GDP.

Parliament is expected to vote on the cuts and budgetary revisions early next week.

On Wednesday, lawmakers approved at committee level a separate draft law on adopting the private debt writedown. Parliament's plenary session will vote on the draft law Thursday.

The deal calls for private investors to swap their Greek government bonds for new ones with less than half the face value, longer repayment periods and lower interest rates – an average 3.6 percent compared to the previous 4.85 percent. Greece wants the swap to take place by March 12, two days before a batch of bonds expire.

"The law must be voted by tomorrow night ... because otherwise we will not meet our deadlines," Finance Minister Evangelos Venizelos told the committee.

"The decisions that have been taken and those that will be made, create the conditions that will help the recovery and growth of the Greek economy," Prime Minister Lucas Papademos said after briefing President Karolos Papoulias on the eurozone decisions. "Much remains to be done in the coming weeks."

Both pieces of legislation are expected to be approved, as the interim governing coalition headed by Papademos, a former central banker, controls 193 of the House's 300 seats. But earlier this month the two coalition partners – the majority Socialists and the conservatives – were forced to expel a total 43 deputies who rebelled against new austerity cuts.

It remains uncertain whether even the combination of new bailout and writedown will be enough to save Greece, whose economy is in a fifth year of recession and could continue to shrink as the cutbacks cripple consumer spending and investment.

Greek stocks tumbled for a second day after the bailout deal, losing 5 percent shortly before market closing.

Even with the writedown, Greece's public debt will be reduced at best from euro368 billion ($487 billion), or nearly 170 percent of GDP last year to 120 percent in 2020 – around the level it was in 2009.

Greek retailers said Wednesday the prolonged austerity and recession were expected to cost another 100,000 jobs in the sector in the first half of 2012 alone – following 65,000 job losses in June-December 2011. About one employee is hired for every seven laid off.

More than one million Greeks, or 21 percent of the work force, were out of work in November.

The government is also cutting private sector wages, with the minimum monthly salary being reduced 22 percent to euro580 ($770) – and euro510 ($675) for workers aged under 25, an age group that suffers from 50 percent unemployment. Salaries are even lower for part-time employees.

Dimitris Asimakopoulos, head of General Confederation of Professionals, Craftsmen and Merchants, GSEVEE, presented a new study showing that 180,000 businesses are at risk of closing in 2012, with at least 61,000 expected to fail.

"The study reveals, with facts and figures, that we are unfortunately stuck in the mire of recession," Asimakopoulos said. "We will not emerge from this with wishful thinking about competitiveness and euro300 salaries."

Werner Hoyer, the new president of the European Investment Bank, told Germany's Handelsblatt newspaper that "Greece now needs, alongside the unavoidable austerity program, a Marshall plan too " – a reference to the U.S. aid plan that rescued an impoverished Europe after World War II.

Hoyer suggested that Greeks working in the European Commission and other EU bodies should be motivated to return home and help out, to avoid the impression that Greece "is under tutelage and directed by others."

But he said the structural reforms Greece needed could take up to two decades.

Police said some 6,500 people took part in two separate peaceful protests outside Parliament, called by the country's two main unions and a Communist union.

Braving a cold drizzle, protesters shouted "We can't survive on euro400," and "EU, IMF, out."

The rallies were heavily policed, as previous protests have turned violent. Rioters burnt and looted dozens of shops in central Athens during a rally on Feb. 12.

Papademos, who is unelected, has a sole mandate to see through the twin bailout and debt relief deal, and is expected to step down by early April ahead of national elections. Polls show that conservative New Democracy would likely come first, but without a large enough majority to govern alone.

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Derek Gatopoulos and Elena Becatoros in Athens, and Geir Moulson in Berlin contributed.

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Filed by Benjamin Hart  |