Junk economy?

Stocks fell in Europe and on Wall Street after credit rating agency Standard and Poor's cut its credit rating on Greece to junk status on Tuesday.

The news means that lending to the country is considered to be speculative rather than an investment.

The agency lowered both Greece's long-term and short-term debt ratings. The euro fell by 1 percent against the dollar on Tuesday as the ratings agency also slashed its credit ratings for Portugal.

Greece's outlook was "negative", a statement from the agency said. It added that the country's status could be downgraded further "if the Greek government's ability to implement its fiscal and structural reform program materially weakens in our view."

That would occur, the agency said, if the Greek government was "undermined by domestic political opposition at home or by even weaker economic conditions than we currently assume."

In an attempt to quell concerns, European Union President Herman Van Rompuy said that the negotiations for the aid to Greece were going according to plan.

Speaking during an official visit in Tokyo Wednesday morning, Van Rompuy stressed "there is no question about restructuring" Greek debt with aid negotiations under way and "well on track."

Challenges faced by Greece

Greece has been hit by a series of strikes in recent months in protest against the introduction of austerity measures.

"The downgrade results from our updated assessment of the political, economic and budgetary challenges that the Greek government faces in its efforts (to cut debt)," Standard and Poor's credit analyst Marko Mrsnik said.

"We believe that the government's policy options are narrowing because of Greece's weakening economic growth prospects, at a time when pressures for stronger fiscal adjustment measures are rising," the statement continued.

Package needed to pay debt

Last week, Greece asked the European Union and International Monetary Fund (IMF) for loans worth up to 45 billion euros ($59.5 billion) this year.

Following the downgrade, Greece called for European governments to act quickly to activate a multi-billion-euro bailout package for the country.

It said that it would no longer be possible raise funds on international markets and that it needed the money to pay back debt due in three weeks. "Given our inability to access the markets," said Greek Finance Minister George Papaconstantinou, "the procedure must be complete, agreed, signed and the release of funds initiated from the IMF and our European peers."

In its downgrade of Portugal, Standard and Poor's cited concerns about the country's ability to deal with high debt levels in view of the country's weak economic outlook. It cut the rating by two notches to a level that is four notches above junk status.

European equities suffered their biggest losses in two months, with the Europe-wide FTSEurofirst 300 index closing down 3.07 percent.

rc/AFP/Reuters

Editor: Susan Houlton