Moody's Investors Service downgraded Greece's debt rating by four notches to Ba1 from A3. after a similar move by Standard & Poor's in April. In response to Moody's move spreads on Greece's bonds widened.

The widening spread shows that traders are asking to be paid more to assume the risk of holding Greece's debt. The gap between Greek and comparable German bonds reached 650 basis points from 595 on Monday. Greece's downgrading led to Spanish bonds widening .

The Athens Stock Market opened with 2.18% losses on Tuesday but soon recovered to pass into positive territory, indicating that last days dynamic still holds despite Moody's downgrading. EU Commissioner for Monetary Affairs Olli Rehn, however, launched an attack against the rating agency describing it as "weird ". In the same line were reactions of Finance Minister and Greek banks.

The Greek government rejected on Monday night a Moody's Investors Service report downgrading Greek bonds to junk, saying that "today's downgrading of the Greek economy by the Moody's firm in no way reflects neither the progress achieved over the past months nor the prospects opening up from fiscal restructuring and the improvement of the country's competitiveness."

A Greek finance ministry statement added that "data on the implementation of the budget show with great clarity that the programme which Greece has agreed with the European Union, the European Central Bank and the International Monetary Fund is being carried out as normal, with the deficit having decreased 40 percent compared to 2009.

This considerable improvement has been recognised by the European Commission, the European Central Bank and the International Monetary Fund. In addition, recession in the first quarter is smaller than what is anticipated by the Memorandum for the entire year. Receipts from VAT, that was created during the first quarter, increased 6 percent while last year they had decreased 11 percent.ana-mpa

"All various structural actions anticipated in the Cooperation Memorandum are being implemented as normal and many are already ahead of the timetable that has been set. The course of the debt, although on an upward trend today, is expected to de-escalate as of 2013 and maybe earlier since more favourable conditions appear to be shaping gradually.

"The Greek Government remains absolutely adherred to the task of monetary adjustment and the improvement of the country's development prospects."

A top Moody's analyst on Tuesday defended the international ratings agency's decision, a day earlier, to downgrade Greek government bonds by an eyebrow-raising four notches, Ba1 from A3.

Asked by the ANA-MPA on Tuesday to justify the downgrade when its own report stated that the possibility of a Greek default is less likely, Sarah Carlson, Moodyβs lead sovereign analyst for Greece, said:

"Ratings are moved when we think that a country's creditworthiness changes. The probability of default associated with a Ba1 rating is low (historically it has been around 7 percent over a five-year time horizon).

The decision was thoroughly criticised by top EU officials, including Commissioner Olli Rehn, as well as lambasted by the Greek government. (ANA-MPA)

Queried on whether the downgrade merely rekindles the "spectre" of a possible sovereign debt default, Carlson said:

"The downgrade is perhaps a reminder that Greece has a significant economic recovery and debt challenge ahead of it, beyond the scope of the IMF/EU programme. I don't think it brings back the spectre because we say clearly that the risk of default is quite low."

In defending the agency's controversial decision to announce the downgrade now instead of waiting for a Troika (IMF, Commission, ECB) report in July on Greece's fulfilment of criteria envisioned in the eurozone-IMF bailout package, she said Moody's announced it would "change the rating once new policy measures had been announced and we had fully evaluated their impact on both growth and the fiscal position.

"We even said approximately when the downgrade would occur. Finally, we also indicated that any downgrade was likely to be multi-notch and might take the rating to sub-investment grade territory," Carlson concluded.