Greek Debt Rating Cut to 'Junk' Status

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Portuguese public transportation workers went on strike against a government austerity plan intended to cut the budget deficit to 2.8 percent of gross domestic product in 2013 from 9.4 percent last year, Reuters reported. Public employees would face a salary freeze.

“It cannot only be the workers who pay,” said Manuel Leal, spokesman for the Fedtrans transport union, according to Reuters.

Greek transportation workers also walked off the job Tuesday to protest austerity measures, while the country’s labor unions called a national strike for next week.

Among investors there was growing pessimism that Greece would be able to repay its debt, equal to 115 percent of G.D.P., without a restructuring plan that would spread out the payments. Such a plan would effectively cut the value of Greek bond holdings.

S.&P. reinforced fear of a restructuring Tuesday. If there is a default, S.&P. estimated that investors might recover only 30 percent to 50 percent of their money.

German politicians, like Frank-Walter Steinmeier, leader of the opposition Social Democrats in Parliament, have fed speculation about a restructuring plan by calling for banks to share the costs of a Greek rescue. Greek and European Union leaders say restructuring is not on the table.

S.&P. forecast that Greece’s debt problems would only get worse, rising to 131 percent of GDP in 2011, the agency said. At the same time, growth would be nearly flat until 2016, meaning that the government could not count on expansion to lift tax receipts.

The agency also noted that the debt crisis was putting increasing pressure on Greek companies and banks. Greek businesses typically must pay interest rates tied to the rate on government bonds, and Greek banks are vulnerable because of their extensive holdings of their government’s debt.

Stock markets in Europe tumbled after the announcements.

In London, the FTSE 100 closed down 2.7 percent, the CAC-40 in Paris shed 3.8 percent and the IBEX 35 in Spain lost 4.2 percent. The PSI 20 index in Lisbon was off 5.4 percent and the Athens stock exchange general index slid by 6 percent, taking its year-to-date losses to 22.8 percent.

Banks were hit hard. The financial sub-sector of the Euro Stoxx 600 index lost 3.9 percent. UBS, the Swiss bank, lost 4 percent and Société Générale of France fell by 6 percent. Shares in National Bank of Greece tumbled 10 percent and Agricultural Bank of Greece, majority owned by the state, closed down 13.8 percent.

The yield of the 10-year benchmark Greek government bond surged to 9.7 percent, yet another record since the inception of the euro. German and French yields fell, suggesting that investors were rushing out of riskier fixed-income assets into safer harbors.

The yield spread, or difference, between Greek and German 10-year bonds surged to 680 basis points, the highest since 1998. Yields on Portuguese and Irish bonds also surged, although those of Spanish bonds fell slightly.

Mr. Papademos’s unusually stern comments to the European Parliament are the latest expression of concern by the E.C.B. about the risks still embedded in the region’s economy even though most countries have emerged from recession.