Greece launched a tirade against credit ratings agencies Monday after Moody's downgraded its debt grade further below junk status, warning the bailed-out euro country might have to default on its massive borrowings.

The agency slashed its rating by three notches to B1 from Ba1 and warned it may cut again if the government's commitment to austerity wanes or international creditors become less willing to support it. Greece was saved from bankruptcy in May 2010 after accepting a €110 billion ($154 billion) bailout from partners in the EU and the International Monetary Fund.

The Greek government's response was quick and critical. It said Moody's downgrade was "completely unjustified" and "does not reflect an objective and balanced assessment" of Greece's actual economic prospects. 

"Ultimately, Moody's downgrading of Greece's debt reveals more about the misaligned incentives and the lack of accountability of credit rating agencies than the genuine state or prospects of the Greek economy," the finance ministry said.

It said the agencies — rivals Standard & Poor's and Fitch Ratings have also downgraded struggling countries like Greece heavily in past months— were trying to make up for failing to predict the financial and debt crises.

"Having completely missed the build-up of risk that led to the global financial crisis in 2008, the rating agencies are now competing with each other to be the first to identify risks that will lead to the next crisis," the ministry said.

Moody's looks to 2013

In explaining its downgrade, Moody's warned the Greek government's economic program may not yield the intended drop in debt and return to growth, and noted its considerable difficulties in raising revenues. It also highlighted the risk of more onerous conditions when the current bailout package ends in 2013.

"The risk of a post-2013 restructuring might lead the Greek authorities and investors to participate in a voluntary distressed exchange before that time," Moody's Investor Services said.

The Greek finance ministry queried the timing and the multinotch nature of the downgrade, describing them as "incomprehensible" in the wake of the government's success in cutting its budget deficit by 6 percentage points in 2010 to around nine per cent of the country's national income. It has pledged to bring the deficit to the EU limit of three per cent by 2014.

Despite the progress the country is making, Greek national debt is still to exceed 150 per cent of GDP this year, while the economy is forecast to contract three per cent in 2011 as a whole. 

The finance ministry said the reduction in the budget deficit was the "strongest evidence that relative to last year the risk of sovereign default has not increased but rather decreased as Greece is on a bold path towards fiscal consolidation." It said Moody's analysis fails to properly take into account the "upside impact" on the economy from the government's fiscal consolidation and structural reforms program.

"At a time when the global economy is fragile and market sentiment is sensitive, unbalanced and unjustified rating decisions such as Moody's today can initiate damaging self-fulfilling prophecies and certainly strengthen the arguments for tighter regulation of the rating agencies themselves," it added.

Raters overly cautious now: some analysts

Credit ratings agencies have been criticized in recent years for having presented a too-rosy view of the global economy in the run-up to the financial crisis, which led to the deepest recession since the Second World War and ignited worries about the state of government finances, particularly in Europe.

Some analysts argue that agencies have now gone too far the other way — playing it safe by being excessively pessimistic — and market regulators are planning reforms to better supervise them.

Standard & Poor's and Fitch rate Greece slightly higher at BB+ though S&P has recently warned that it may lower its view soon.    Whether Greece ends up restructuring its debts — effectively reducing the amount it pays to creditors — could well hinge on whether the country can get the support of investors in the bond markets.

Given the bailout it clinched, it doesn't have to do anything substantial soon. However, Greece is trying to keep a presence in the markets and is due to auction C1.25 billion worth of 26-week treasury bills Tuesday.

At the moment, it's effectively blocked from issuing longer-term debt because of the exorbitantly high costs involved. The interest rate the markets are charging Greece to borrow money for ten years is over 12 per cent, nearly nine per cent more than the rate Germany has to pay even though the two countries share a currency.