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S&P takes Greece off credit watch

LONDON (AP) - The Greek government won key backing from the Standard & Poor's credit rating agency for its efforts to dig out of a debt crisis that has shaken up the entire eurozone.

Standard & Poor's said Tuesday it was taking Greece off so-called credit watch. That means the agency is not thinking about downgrading the country's credit rating for now - to the relief of the Greek government as it tries to plug its deficit by tapping the international bond markets for cash.

The agency said the Greek government's package of measures was "appropriate" to achieve its target of reducing the budget deficit by a huge four percentage points this year from 12.7 percent of the country's national income. However, it slapped a longer-term negative outlook on Greece as it cautioned about the government's ability to sustain its reform momentum past this year.

For now though, Standard & Poor's has kept the country's BBB+ credit rating unchanged.

"We view the government's fiscal consolidation program as supportive of the ratings at their current level, hence our rating affirmation," said Standard & Poor's credit analyst Marko Mrsnik.

Of the three main credit rating agencies, Standard & Poor's had the lowest rating on Greece. The removal from credit watch is a hopeful sign that the Greek debt crisis could be easing.

The markets certainly breathed a sigh of relief that Greece was not facing an imminent downgrade, which could have reignited market fears that the country may default on its debts without massive assistance from its partners in the eurozone. A vague promise of support that could include loans made by eurozone finance ministers Monday evening got a modestly positive response and helped shore up investor sentiment.

Following S&P's statement, the euro shot up to a session high against the dollar. By mid afternoon London time, the euro was 0.5 percent higher at $1.3737. Stocks also rallied.

Standard & Poor's rating affirmation on Greece comes in the wake of the Greek government's latest batch of spending cuts and tax increases.

The measures were partly designed to show the international investing community that the country has a concrete strategy to deal with its debts. The additional measures are designed to reduce the deficit by a further euro4.8 billion, taking the total reduction to a massive euro16 billion.

Greece needs the support of bond investors, as it has to roll over around euro55 billion of debt this year, including euro20 billion in the next couple of months. It wants to be able to tap the bond markets for cash at cheaper rates - another downgrade from Standard & Poor's would have made it even more expensive.

Greece has been able to sell bonds but at high interest rates that could eventually make fixing its deficit harder if they do not come down.

Greece isn't out of the woods yet. Standard & Poor's said it was changing its outlook on Greece's debt to negative from stable as it warned that further difficult budgetary measures will have to be announced.

"Despite the new measures, we think it will be difficult for Greece to comply fully with its planned consolidation path, reducing its deficit to 5.6 percent of GDP in 2011 and 2.8 percent of GDP in 2012, if it does not implement additional measures in the coming years," said Mrsnik.

Making matters even more difficult, Mrsnik said, is the fact that the Greek economy will not grow nearly as fast as it previously predicted, thereby eroding the tax base - in fact, S&P is now forecasting that the Greek economy will shrink by a further 4 percent this year.

Mrsnik said the negative outlook "indicates further downgrade potential if the government fails to address negative deviations from its budgetary consolidation path or implement the currently planned structural reforms."

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