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A day after European leaders agreed on a $900 billion rescue package, credit rating agency Moody’s cautioned investors that two of the euro zone’s hardest hit countries aren’t out of the woods just yet.

In the last month, Moody’s has said several times that debt-strapped Greece and Portugal are under review for future downgrades to their credit ratings. But in a report to investors Monday, the agency said those downgrades could occur within a month.

Greece’s downgrade would probably be more “substantial” than previously indicated, with cuts to the Baa range, or just above junk status, the report said.

“This will depend on developments in the Greek economy once the fog of financial panic, support-mobilisation and street demonstrations dissipates,” Moody’s wrote. “The country’s debt is large but not unbearable; however, the required adjustment is obviously very painful, and short-term economic prospects are clearly dismal.”

Portugal’s possible downgrade is less severe than that of Greece, as Moody’s said it is considering a one-notch cut to Aa3 from Aa2. Both ratings are so-called investment grade and considered relatively low risk.

Both reviews will be decided on within the next four weeks, Moody’s said.

Last month, Moody’s cut the rating on Greece’s government bonds down one notch to A3 — still an investment grade, although not an entirely high-quality, level. At the time, Moody’s cautioned that further downgrades were possible as it continues to review Greece’s economic outlook.

Credit ratings are used by investors to evaluate the risk of a default on government bonds. The yield on Greek bonds recently soared to record highs, as investors worried that the country could default on its debt. Another cut to Greece’s credit rating could fan the flames of investors’ fears, making it even more difficult for the country to sell bonds.

In its report on Monday, Moody’s said it also has a negative outlook for Ireland, which is struggling with debt but has greater economic and institutional strength than some of the beleaguered countries in Europe’s “southern periphery.”

On April 27, another credit rating agency, S&P slashed Greece’s rating to junk status and a day later, it cut Spain’s rating to a low-rung investment grade. To top of page

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Eurozone members have made a commitment to providing up to €30bn in loans to Greece over the next year to help stave off a debt crisis that has roiled financial markets and posed the most serious challenge to the euro in its history.

Those funds were agreed during an extraordinary teleconference of eurozone finance ministers on Sunday and would be supplemented by contributions from the International Monetary Fund that could yield an additional €15bn (£13.2bn, $20.2bn) according to European officials.

The rates charged to Athens would be around 5 per cent for a three-year fixed loan — above the IMF’s standard lending rate but below those currently demanded by jittery investors. Two-year Greek bonds were last week trading at 7.45 per cent.

At a press conference in Brussels on Sunday, European officials presented the three-year package as the detailed commitment that financial markets have been demanding after a series of vague communiqués failed to ease the crisis.

“This is the step of clarification the markets are waiting for,” said Jean-Claude Juncker, the Luxembourg prime minister and eurogroup president. “It shows there is money behind this.”

IMF managing director Dominique Strauss-Kahn said the eurozone agreement marked “an important step”, adding that the IMF was ready to contribute financing when necessary and would hold talks in Brussels Monday with the Commission and Greek authorities.

In Athens, George Papaconstantinou, Greek finance minister, made clear that the government had not yet asked for the money, and expressed confidence that the very existence of the package would allow his country to access debt markets at sustainable rates.

“We believe we can continue to borrow on the [international capital markets] without obstacles,” Mr Papaconstantinou said.

A key test of market sentiment will come on Monday, when Greece will attempt to raise €1.2bn through the sale of three and six-month paper.

Details of the rescue package were the result of months of sparring among eurozone members that revealed deep divisions about how to address the immediate crisis as well as broader disputes over economic governance.

One of the most contentious issues was interest rates, with Germany insisting that Greece pay “market rates” and France and other eurozone members pushing for easier terms.

Olli Rehn, Europe’s commissioner for economic and monetary affairs, insisted that the pricing agreed by the 16 eurozone members did not constitute a subsidy for Greece. Their contributions to any rescue would be proportional to their capital commitments to the European Central Bank, leaving Germany with the largest share.

Representatives from the Commission, the ECB and the Greek government will meet with the IMF on Monday to negotiate additional features of the package, including conditions that would be imposed on Athens and the exact size of the IMF contribution.

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Facing firm demands from the European Union and financial markets to cut its deficit, Greece announced cost-cutting measures Wednesday that will save the debt-challenged country €4.8 billion, $6.53 billion, this year.

The Greek government plans to cut civil service workers’ entitlements by 12%. This includes a 30% decrease in holiday bonus payments, according to The Wall Street Journal’s online edition. Officials also said civil service pensions will be frozen for the year.

To increase revenue, the Greek government said it will raise the value-added tax to 21% from 19% on items including clothing and footwear. Sales tax on food and medicine will rise to 10% from 9% and the tax rate on printed products will increase to 5% from 4.5%.

The country will boost the tax on alcohol by 20% and raise the tax on tobacco to 65% from 63%. Taxes on gasoline prices will be hiked by €0.08 per liter.

Officials expect the measures will reduce Greece’s budget deficit to 8.7% of the country’s gross domestic product this year from a level of 12.7% last year, according to the report. The European Union had given Greece until March 16 to show it is making progress in cutting its deficit from more than four times the allowed level.

Umbrella union for civil servants ADEDY is already speaking out against the measures and has called for a 24-hour general strike on March 16, said the Journal.

In a speech to parliament Tuesday, Greek prime minister George Papandreou said the country risks bankruptcy if it neglects to find lenders to cover its €300 billion, $409 billion, in debt, the Journal said.

Greece is preparing to raise between €3 billion and €5 billion, $4.1 billion and $6.8 billion, in a 10-year bond sale. To top of page

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