S&P downgrades Greece while concerns mount over secret defence budget

Standard & Poor’s has become the second rating agency to downgrade Greek sovereign debt to near junk levels of BBB+, issuing a withering verdict on Spartan plans unveiled this week by premier George Papandreou.

Greece has refused to release key information about its large defence budget

“The downgrade reflects our opinion that the measures to reduce the high fiscal deficit are unlikely, on their own, to lead to a sustainable reduction in the public debt burden. If political considerations and social pressures hamper progress, we could lower the ratings further,” it said.

The move came as Spyros Papanikolaou, head of Greece’s Public Debt Management Agency, held back-to-back meetings with bankers in London in a bid to stop the crisis spiralling out of control.

Yields on 10-year Greek bonds surged to 5.75pc, a spread of 254 basis points over German Bunds. Borrowing costs are nearing levels that risk setting off an interest compound spiral. The public debt is already 113pc of GDP. S&P said it is likely to reach 138pc by 2012. “The increasing debt-service burden narrows the scope for debt stabilization,” it said.

Fitch Ratings precipitated the Greek crisis earlier this month with a surprisingly harsh downgrade to BBB+, accompanied by a “negative outlook”.

It emerged yesterday that Greece had raised €2bn (£1.77bn) at a premium of 30 basis points in a private placement shortly after the Fitch move, avoiding the public glare of an auction.

To make matters worse, there were fresh concerns yesterday about the true scale of Greek military spending, which is kept off the books of the debt agency.

“Greek military accounts seem to be regarded as a state secret,” said Chris Pryce, Fitch’s director of sovereign ratings.

“In every other EU country we can find out how much they spend on defence, but we don’t know for Greece. All we know is that their military spending is very large, around 5pc of GDP,” he said.

Analysts who have probed deeply into Greek accounts have been astonished to discover that parts of the public sector lack double-entry book-keeping, 700 years after it was invented by the Venetians.

Given Greece has misled the bond markets and Brussels in the past over its deficits, analysts suspect that Athens may try to hide problems behind a military veil. Mr Papandreou admits that Greece has lost “every shred of credibility”.

Greece has already cut defence this year. It announced in September that it would not take delivery of four submarines built by ThyssenKrupp, alleging technical faults. This has led to accusations Athens is effectively defaulting on a €520m contract. Last week it cancelled tenders for a flight of maritime aircraft worth up to €250m.

The Greek military, especially the air force, is highly regarded by NATO, but its size is increasingly hard to justify as tensions ease with rival Turkey.

Mr Pryce said that the austerity measures promised this week by Mr Papandreou were too vague to reassure the markets, even though they were enough to set off a wave of strikes, kicked off by teachers yesterday.

The refusal to reduce the wages of most public employees contrasts sharply with Ireland, where public pay was cut 7pc in April and will be cut 6pc more in January, the most wrenching adjustment in a modern economy since the 1930s.

“There is a lack of substance. The danger for the Greek government is that public pay becomes an icon for the market. The contrast with Ireland is something that all traders have noticed,” Mr Pryce said.