Ratings firm Standard and Poor’s (S&P) downgraded the credit rating of Greek debt to junk bond status on Tuesday, sending global financial markets into a tailspin.
"The downgrade results from our updated assessment of the political, economic, and budgetary challenges that the Greek government faces in its efforts to put the public debt burden onto a sustained downward trajectory," said Standard & Poor's credit analyst Marko Mrsnik in a press release on Tuesday.
The news hampers the European Union nations, and may have contagion effects across the continent. S&P also downgraded Portugal's credit rating. Greece’s rising debt service, which currently exceeds its its GDP by 30 percent, could result in significant budget cuts and even higher unemployment, as rising social tensions hit dangerous levels.
The reduction to junk bond status has also placed pressure on the euro, spawning a massive sell off in the financial markets Tuesday indicating a rising financial crisis for the EU. The Dow Jones Industrial Average dropped 213 points, almost 2 percent. In London, the FTSE 100 declined even more, by 2.6 percent, and the German DAX declined 2.7 percent.
The status could be revised and downgraded even further, says S&P, if growth prospects for Greece’s economy prove to be weak.
"A further downgrade is possible if, in our view, the Greek government's ability to implement its fiscal and structural reform program is undermined by domestic political opposition or materially weakens for other reasons, including even weaker economic conditions than we currently assume," said Mrsnik.
The downgrade comes just as Greece has put in a joint request for a bailout package from the International Monetary Fund and EU.