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updated 4/22/2010 11:00:33 AM ET 2010-04-22T15:00:33

Markets hammered Greece on Thursday after the EU revised the debt-ridden country's deficit and debt figures upward, sending Greece's borrowing costs to unsustainably high levels and pushing Athens closer to an expensive rescue.

Further bad news emerged as ratings agency Moody's Investor Services downgraded its rating on Greece's debt by one notch to A3 from A2, and warned that further downgrades were a distinct possibility.

"This decision is based on Moody's view that there is a significant risk that debt may only stabilize at a higher and more costly level than previously estimated," the agency said.

Moody's downgrade was likely to make it even more difficult for the cash-strapped Greek government to tap the bond markets for money. The government has insisted that it prefers to access money via the markets to meet its borrowing requirements instead of resorting to a joint eurozone-International Monetary Fund rescue package.

But with investors demanding such punishing rates, the possibility of getting by without the bailout seems increasingly remote.

"Greece is in the midst of another hellish week and now faces no choice but to seek to formally activate the European rescue package," said Ben May, European economist at Capital Economics. "While this may help to ease the markets' frazzled nerves, the latest upward revision to the 2009 budget deficit highlights the mammoth task ahead."

The European Union's statistics agency Eurostat said the country's budget deficit in 2009 stood at 13.6 percent of gross domestic product rather than the previously predicted 12.9 percent, and could be further revised by up to 0.5 percentage points.

Four times the limit
The level is more than four times the EU limit set for the 16 countries that use the euro currency, which has been badly hit by the Greek financial crisis. Eurostat also revised the ratio of government debt to GDP to 115.1 percent, up from 113.4 and the second highest in the EU after Italy.

Athens insisted its target of reducing its deficit by at least 4 percentage points in 2010 remained unchanged.

"The government has already adopted all the necessary measures in excess of 6 percent of GDP to ensure the achievement of this objective," the Finance Ministry said in a statement.

The revision came as the civil servants' strike disrupted public services, shut down schools and left state hospitals working with emergency staff. Protesters from a Communist-backed trade union blockaded Athens' main port of Piraeus, disrupting ferry services.

But demonstrations in Athens were far smaller than those of other recent strikes, with just 3,000-4,000 protesters marching through the city center. Scuffles broke out when a group of about 150 demonstrators challenged police lines near the city's central Syntagma Square. Police responded with small amounts of tear gas.

News of Eurostat's revisions sent Greece's borrowing costs skyrocketing to alarming levels. The interest rate gap, or spread, between Greek 10-year bonds and German ones — considered a benchmark of stability — widened to a record 5.67 percentage points minutes after the announcement, from 5.03 percentage points earlier in the morning.

The high rates reflect market concern about the country's ability to pay back its debts. A default by a eurozone country would be a serious blow to the euro, which also has other members who face financial woes — notably Spain, Portugal and Ireland.

The spreads translate into prohibitively high interest rates of more than 8 percent — levels way too high for Greece to endure for long — making it increasingly likely that Greece will ask to make use of the joint eurozone-International Monetary Fund aid package which would provide the country with much-needed cash at lower rates. That would enable it to avoid default, at least for now.

German Finance Minister Wolfgang Schaeuble, whose country has been extremely reluctant to provide a bailout for a country that has repeatedly flouted eurozone rules, indicated he does not believe Greece will ask for assistance before mid-May.

Asked in an interview with Deutschlandradio broadcaster whether he thought Athens would ask for the rescue package before mid-May, Schaeuble replied "I don't think so."

The Greek government began talks Wednesday in Athens with the IMF, the European Central Bank and the European Commission this week to hammer out details for the three-year rescue package.

Debt pile
Struggling to cope with a debt pile of €300 billion ($406 billion), Greece needs to borrow about €54 billion this year alone, with about €10 billion of that next month. It has €8.5 billion worth of 10-year bonds maturing on May 19.

Prime Minister George Papandreou said his country was going through an "unprecedented crisis, ... a crisis the likes of which no other government has faced in the past."

The government's duty, Papandreou said during a Cabinet meeting, "is to take every decision which prevents the worst for Greeks, every decision which solves problems that for decades we preferred not to touch, every decision which serves the national interest."

He stressed that the rescue package would provide €30 billion in bilateral loans from other eurozone countries "if and when it is needed." The package would also provide about €10 billion from the IMF, bringing the total to at least €40 billion for this year — more than Greece needs at this stage.

"With the EU-ECB-IMF talks underway in Athens, speculation persists that Greece authorities will soon activate (the) recently established aid package," HSBC said in a note to investors. "What is less clear is whether that action, if and when it happens, will be viewed as helpful to Greece debt markets and the euro."

Greece is not the only eurozone country facing financial problems, HSBC noted. "Hence, saving Greece via the EU/IMF aid package may not stop the market from assessing that other countries may encounter similar difficulties in tapping capital markets and servicing their debt going forward."

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

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