European stocks tumbled on Tuesday after Greece's credit rating was downgraded. A lack of confidence in the country's fiscal policy has resulted in it having the lowest credit rating in the euro zone.

The New York and London-based credit agency Fitch Ratings Ltd. downgraded Greek long term debt ratings, from A- to BBB+, in response to a huge public deficit.

The Greek stock market closed down more than 6 percent on Tuesday, along with the FTSE 100 index which dropped 1.65 percent.

The credit agency went on to downgrade the ratings for five Greek banks. Fitch said that although the banks were likely to perform "adequately" in the fourth quarter and in 2010, "there is a high risk that Greece's weak fiscal position, which mainly caused the sovereign rating downgrade, could accentuate the deterioration of the economy."

This news came as Greece was still reeling from days of violent protests and riots on the anniversary of the shooting-death of a teenager 12 months ago.

Potential loss of eligibility

Earlier on Tuesday, Standard & Poors had also threatened to take the same steps if the country did not take drastic steps to bring the deficit under control.

Goldman Sachs analysts remarked that the credit ratings drop marks the first time a euro-zone country's bonds had dropped to a point at which they would not be eligible for use as collateral at the European Central Bank (ECB) except for a "temporary change of rules in response to the (global) crisis."

"In other words, unless the ECB fiddles with its rules before the end of next year, then from the beginning of 2011, Greek sovereign bonds will no longer be eligible for ECB collateral if Moody's or SandP downgrade them," they said.

On Monday, ECB Chief Jean-Claude Trichet had admonished Athens, saying Greece needed to make "courageous" decisions.

Economy cannot cope with shocks

Greek Economy Minister Georges Papaconstantinou said the country was going through enormous economic difficulties. Papaconstantinou added that he would present the EU Commission with specific measures in January and a supplementary budget in 2010 if required.

The new administration, which ran on a platform of boosting the economy and helping the poor, forecast a 12.7 percent public deficit in 2009 or more than twice the EU-permitted ceiling, and debt of 113 percent of gross domestic product.

Fitch said the economy, with a high debt ratio, was poorly placed to cope with any shocks such as the burden of an aging population.

The downgrade caused a stir in Brussels on Tuesday, as the European Commission urged the Greek government to take action to reduce its deficit.

"A difficult situation in one euro-area member state is a matter of common concern for the euro area as a whole," warned outgoing European Union economic and monetary affairs commissioner Joaquin Almunia in a statement.

sjt/AFP/Reuters/AP
Editor: Susan Houlton