Greek bonds rated 'junk' by Standard & Poor's

Greece's debt has been downgraded to junk status by rating agency Standard & Poor's amid concern it could not take steps to tackle its economic crisis.

It makes the struggling nation the first eurozone member to have its debt downgraded to junk level.

Portugal's debt was also lowered on fears the trouble could spread - sending stock markets sharply lower.

Greece wants 40bn euros (£34bn) from eurozone governments and the IMF to shore up its finances.

But there are fears it will not meet conditions needed to access the funds it needs to make looming debt repayments.

Doubts intensify

When ratings agencies downgrade the country's credit rating - it means they think it is now a riskier place to invest. If it reaches junk status, a country loses its investment grade status.

S&P said it was lowering its rating on Greece's debt to BB+ from BBB-. It also reducing Portugal's debt rating by two notches to A- as doubts intensified about countries with substantial debt relative to GDP.

The news rocked markets in Europe and the US. In London, the FTSE 100 index closed down 2.6% with most of the losses following S&P's downgrade of Greece. Germany's Dax index slid 2.7% and the French Cac-40 lost 3.8%. On Wall Street, the Dow Jones index was 1.4% lower at 11,052.1 points.

Meanwhile shares in Greek banks slumped by more than 9%, the largest one-day fall in bank shares for 18 months.

'Prohibitive' rates

On Monday, German Chancellor Angela Merkel had pledged German support to a European financial aid package for Greece, provided "certain conditions" were met.

She said that Germany would play its part in order to ensure the future stability of the euro but that Greece would have to be ready to accept "tough measures" over several years in return.

The unpopularity of austerity measures is worrying markets

Greece needs to raise 9bn euros ($11.9bn; £7.7bn) by 19 May, but has said it cannot go to the markets because of "prohibitive" interest rates.

The Greek government's cost of borrowing on the money markets has reached record levels in recent days amid investor concern over whether a 40bn euro bail-out package for Greece will be agreed.

Eurozone countries, together with the International Monetary Fund, have yet to agree details of the package.

Investors are also concerned that the Greek government's austerity measures - designed to cut domestic spending and reduce its ballooning budget deficit - will prove too unpopular with the Greek public.

S&P warned holders of Greek debt that they only had an "average chance" of between 30% and 50% of getting their money back in the event of a debt restructuring or default.

It said its action to cut the rating resulted from its "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".

The agency added Greece's weak long-term growth prospects made it less credit-worthy.

(BBC/NEWS)