Standard & Poor’s cut Greece’s long-term sovereign credit rating to B- from B on Friday, warning that liquidity restraints on Greek banks would limit the time the new government has to clinch a deal with its creditors.
Left-wing Prime Minister Alexis Tsipras was elected barely two weeks ago on a promise to scrap unpopular austerity measures imposed under a 240 billion euro ($270 billion) international bailout and write off a chunk of the country’s debt.
Despite a tour of European capitals to drum up support for debt forgiveness, his government seemed isolated in the euro zone.
In addition, the European Central Bank decided this week to bar Greek banks from using Greek government bonds as collateral to borrow from the ECB while there is no prospect of an agreed bailout programme.
“Although the newly elected Greek government has been in power for less than two weeks, we believe its limited cash buffers and approaching debt redemptions to official preferred creditors constrain its negotiating flexibility,” S&P said in a statement.
“Liquidity constraints have narrowed the timeframe during which Greece’s new government can reach an agreement with its official creditors.”
The rating agency said both Greece’s long and short-term ratings remained on creditwatch negative, meaning they could be lowered again, and warned that drawn out talks could produce a worsening economic situation in the country.
“A prolongation of talks with official creditors could also lead to … deposit withdrawals and, in a worst-case scenario, the imposition of capital controls and a loss of access to lender-of-last-resort financing, potentially resulting in Greece’s exclusion from the Economic and Monetary Union.”
Also Moody’s said late on Friday that it was placing Greece’s government bond rating of Caa1 on review for downgrade as the agency warned that there was great uncertainty as to the result of talks between the country and its creditors.
“The key driver for the review for downgrade is the high level of uncertainty over the outcome of the negotiations between Greece and its official creditors,” Moody’s said in a statement.
“The outcome could potentially have negative implications for Greece’s ability to meet its funding and liquidity needs and for the probability of default on marketable securities.”