Greece split over cuts despite default risk

The Greek prime minister has failed to muster cross-party support for draconian cuts to public services and spending needed to gain access to the next tranche of international aid.

Despite calls to opposition leaders, George Papandreou has found no support for his austerity cuts, leaving Greece increasingly vulnerable to threat of default on its vast sovereign debt.

But any restructuring of Greece’s debt that led to partial default would damage other peripheral eurozone states such as Spain and Italy, credit rating agency Moody’s said.

A Greek debt default would also risk leaving Portugal and Ireland’s debt at junk status, Moody’s said, adding that it would classify most forms of restructuring as a default.

"A Greek default would be highly destabilising and would have implications for the creditworthiness of issuers across Europe," Moody's Investors Service's chief credit officer in the region, Alastair Wilson, told Reuters in a telephone interview.

"This would result in more highly polarised credit worthiness and ratings among euro zone sovereigns, with the stronger countries retaining very high ratings and the weaker countries struggling to remain in investment grade."

In recent days, Standard & Poor's cut its outlook to "negative" from "stable" for Italy, which has the euro zone's biggest debt pile in absolute terms, while Fitch said it might downgrade Belgium's AA+ credit rating.

Belgium has not had a proper government since elections last June though it is enjoying an economic boom.

Athens is desperate to secure the next €12bn (£10.4bn) tranche of its €110bn bailout funds, and yesterday accelerated its privatization programme.

But the EU said it needs to see broad political consensus on the way forward to secure more aid, given the need to plug a funding gap next year.