Analysts see a one in five chance that Greece will seek a financial bailout and say Ireland, Spain and Portugal are the economies most likely to suffer a similar setback in investor confidence, a Reuters poll found.
Greece fell into its first recession in 16 years in 2009 and is set to become the euro zone's most indebted member this year, with debt estimated at more than 120% of gross domestic product (GDP), despite plans to cut expenditure and hike taxes.
The country launched an ambitious three-year plan on Thursday to slash its budget deficit with defense and hospital spending curbs and pay freezes, designed to boost its credibility, but markets continued to punish Athens.
“Greece has a problem of credibility in terms of implementation of the plans. We have a history of very ambitious plans not implemented,” said BNP Paribas analyst Luigi Speranza.
The plan to shrink the soaring budget deficit to 2.8% of GDP in 2012 did little to convince markets of Greece's ability to resolve a fiscal crisis that has prompted some economists to question its euro zone membership.
But ECB President Jean-Claude Trichet on Thursday dismissed the idea that Greece would leave the euro zone as 'absurd'.
The 16-nation bloc's economy returned to growth in the third quarter of last year, having shrunk for the previous five consecutive quarters in the worst downturn since the Second World War, but some of the member states which had prospered most from membership are still languishing in recession.
Greek Finance Minister George Papaconstantinou said last week during a visit by European Union and European Central Bank officials that there was no prospect of the country needing a bailout.
But analysts were less convinced.
Asked in the January 11-14 poll to assess the probability of Greece seeking a bailout this year, the median response from around 30 analysts was 20%, with the same likelihood that it would be necessary at some point in the next five years.
“It is very difficult for them to reach a consolidation in their balance on their own and I think they will need assistance because otherwise spreads (borrowing costs) will remain high and the deficit will then get even higher,” said Uwe Duerkop at Landesbank Berlin.
Greece's fiscal woes have prompted downgrades from ratings agencies and raised the costs of Greek borrowing, with spreads between Greek and German bonds hitting an 8-month high in December.
Greek assets took a beating late last year after ratings agencies cut the country's debt rating, spooking investors who feared Greece would be unable to borrow in the bond market and might force the EU into a costly bailout, denting confidence in the value of the euro.
Greece is currently rated BBB+ by both Standard & Poor's and Fitch Ratings, and 16 of 27 analysts said Moody's Ratings Service would also downgrade its rating from A2 to a below-A rating by the end of the year.
The cost of insuring Greece's sovereign debt against default rose to a new record high after the stability plan was announced, as analysts said the fiscal targets looked ambitious and more details were needed.
Portugal, Spain and Ireland were voted the most likely amongst the 16-nation bloc to suffer a similar setback in investor confidence this year.
“Spain and Portugal are most vulnerable due to their fiscal outlook. For Ireland the outlook is also not particularly good but it is not as bad,” said Giuseppe Maraffino at UniCredit MIB.
Ratings agencies have already put the three countries on a warning that any failure to curb their growing debts would result in a downgrade to their debt ratings.
Spain's budget deficit has risen sharply and the country is lagging the recovery that has begun elsewhere in Europe as its once booming tourism and construction industries flounder.
S&P warned Spain last month it risks a downgrade if the government does not act to curb the deficit, but Ireland has won some praise from the ratings agencies for beginning to address spending with three austerity budgets over the last 14 months.
Portugal meanwhile looks set to push ahead with spending despite pressure from the International Monetary Fund to cut outgoings and Moody's said on Monday it might downgrade the country's credit rating if it did not take credible measures to control its deficit. (Reuters)