Moody's Investors Service on Tuesday downgraded Greece's credit rating, despite efforts by the new Socialist government to slash public spending and pull the country out of an economic crisis.
The government responded with a promise to redouble it's cost-cutting efforts, while Greek investors responded with relief that the latest downgrade was not more severe.
Moody's became the third rating agency to downgrade Greek government bonds — changing them from an A1 category to A2.
Standard and Poor's and Fitch have also downgraded their assessment of the country's ability to pay back debt.
Greece is facing its worst debt crisis in decades and has come under intense European Union pressure to improve public its finances and comply with deficit limits intended to support the shared euro currency.
The government announced a raft of measures this month to reduce Greece's massive public debt, which has reached euro300 billion ($440 billion). It has promised to gradually bring the budget deficit — projected at 12.7 percent for 2009 — to below the European Union's eurozone requirement of 3 percent of GDP by the end of 2013.
Government officials had indicated last week that a downgrade from Moody's was likely.
But the ratings agency said Greece did not face serious risk over its immediate borrowing ability.
"Greece's repositioned rating of A2 balances the Greek government's very limited short-term liquidity risks on the one hand, and its medium- to long-term solvency risks on the other," Moody's analyst Sarah Carlson, said in a statement.
Shares on the Athens Stock Exchange were up 3.4 percent in midday trading at 2,189 as investors breathed a sigh of relief that Moody's downgrade was not more severe. Banks were leading the march higher.
And the government argued that the relatively mild ratings adjustment displayed recognition that Greece was committed to improving public finances.
"Today's announcement by Moody's downgrading Greek government bonds by one notch keeps the rating ... in the A category, two notches above the ratings of the other two agencies which recently downgraded Greek government bonds," the Greek Finance Ministry said in a statement.
"The government remains committed to the implementation of the reforms announced by Prime Minister (George Papandreou) and will intensify its efforts to restore the viability of fiscal and economic trends in Greece," it added.
Greece still has a long way to go though before it can say it has calmed the markets.
Ben May, a European economist at Capital Economics in London, warned that Moody's could well downgrade Greek debt again next year, bringing it in line with the other major ratings agencies.
"The decision by Moody's to downgrade Greek sovereign debt from A1 to A2 is another sign that the Greek government is doing little to persuade the markets that it can improve the public finances as effectively as it claims," said May.