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Greece downgraded to junk status by S&P

LONDON (AP) - Greece's debt has been downgraded to junk status by Standard&Poor's amid mounting fears that the debt crisis in Europe is spiralling out of control.

In a statement Tuesday, the agency says that it is lowering its rating on Greece's debt to BB+ from BBB- - that means that the country's debt does not carry the investment grade tag.

The agency is also warning debtholders that they only have an average chance of between 30 to 50 percent of getting their money back in the event of a debt restructuring or default.

The downgrade of Greece follows an earlier one for Portugal and comes at the end of another bad day for the eurozone.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

ATHENS, Greece (AP) - Just three weeks away from a potential default, Greece faced unrelenting financial market pressure on Tuesday as investors waited to see whether a promised eurozone and IMF bailout package would reach Athens in time.

A key indicator - the interest rate gap, or spread, between Greek and benchmark German 10-year bonds trading on financial markets - hit a new 12-year high of 6.80 percentage points. That means Greece would pay a crippling interest rate of about 10 percent, tantamount to financial suicide, if it seeks to raise funds through issuing bonds.

It looks even worse on the two-year bond issue, where the yield spiked up another 1 percentage point to 14.85 percent, following Monday's massive 3 percentage point spike. Bond yields rise as their price falls.

Greek company shares plunged for a fifth straight session Tuesday, with the benchmark Athens stock index shedding 6.75 percent to reach 1,683.08 points in late afternoon trading.

The message from the markets is clear - there are real doubts that Athens will be able to service its debts.

"The market is pricing in the realistic prospect that Greece may not be in a position to meet all its debt obligations," said Jane Foley, research director at Forex.com.

Default would hurt the shared euro currency and could lead to the debt crisis spreading to other countries with shaky finances such as Portugal and Spain, threatening them with the same vicious spiral of default fears leading to higher rates.

Athens needs a first batch of money from the rescue to come through by mid-May, as it has €8.5 billion of a 10-year bond maturing on May 19 and no way of paying unassisted. But it faces a long, nail-biting wait with far from guaranteed results.

"Until that day, everything must be concluded," Finance Minister George Papaconstantinou said. "I have absolutely no doubt that we will get there."

Prime Minister George Papandreou said his country stood "naked before international market storms."

"We are going through Greece's hardest time in recent decades," Papandreou told his Socialist party lawmakers. "The challenges our country faces are unprecedented, not only for Greece, but also for Europe and even the world economy. ... And what I say is no exaggeration."

Germany - the single largest contributor to a €45 billion joint eurozone rescue with the International Monetary Fund - is demanding agreement on more strict conditions for the release of the funds ahead of a May 9 election in North Rhine-Westphalia.

"The Greek bond market is now in full scale meltdown," said Jeremy Batstone-Carr, head of private client research at stockbrokers Charles Stanley. "The nightmare scenario from an investor stand point is that either Greece defaults, forcing investors to take a severe 'haircut' on their investments-loans, or the Greek authorities could honor the country's debts and simply shut down all nonessential operations, markedly escalating the strife for the nation's people."

The center-left government is implementing harsh austerity measures to slash the massive budget deficit, which stands at 13.6 percent of gross domestic product.

But central bank governor George Provopoulos warned Tuesday that Athens must surprise markets by greater than promised fiscal improvements if it is to pull itself out of the crisis.

"In order to bring about a definitive reversal of the negative trends, we must surpass ourselves and favorably surprise the markets, by achieving even greater improvements than the ones projected," Provopoulos said in his annual report on the Greek economy.

Reducing the deficit this year by even more than the targeted 5 percentage points would be "of crucial importance for the overall economic climate," he said.

"The Greek economy is in the midst of a deep, structural and multifaceted crisis. The exit from this crisis will therefore require a multi-annual, persistent and systematic effort," Provopoulos said. "It will require a break with the past."

The Bank of Greece has said it expects the economy to contract by about 2 percent in 2010. But Provopoulos said that, with things as they are, "this projection is surrounded by high uncertainty and is subject to high upside risks."

Papaconstantinou said the country's problem was not just to get past the May 19 debt redemption. "It is about persuading the markets that Greece can deal with its debt in the medium term," he told parliament late Monday.

He said the aid program should help Greece through the storm, as the country would "not require immediate access to the markets until the situation calms down."

Over the next three years, Papaconstantinou said, Greece will have to refinance about half of its entire €300 billion debt, and funds would be available by borrowing simultaneously from the market and the rescue.

Civil servants, already hit by cost-cutting measures, will hold a rally in central Athens later Tuesday to protest the rescue plan, fearing further austerity. The capital's public transport workers have started a six-hour work stoppage, while in a bizarre turn even airforce pilots have launched a work-to-rule action against higher taxation of their bonuses.

Greece's two largest labor unions declared a 24-hour general strike for May 5.

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AP Business Writer Pan Pylas in London and Associated Press Writers Elena Becatoros and Derek Gatopoulos in Athens contributed to this story

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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