Standard & Poor's on Wednesday downgraded Greece's credit rating one notch further into junk territory, saying it's likely the country will default on its commercial debt within a year if it can't strike a deal with its creditors.
Greece has shown it is giving higher priority to its pensions and other domestic spending than making debt payments on time, the rating agency said. The country has delayed making a June 5 debt payment to the International Monetary Fund and must pay the lending organization 1.6 billion euros by the end of this month.
The move reflects "our opinion that in the absence of an agreement between Greece and its official creditors, the Greek government will likely default on its commercial debt within the next 12 months," the agency said in its report.
The downgrade comes as Greek leaders are locked in negotiations with European officials over the terms of a fresh $8.1 billion (7.2 billion euros) rescue loan. The loan is needed for the country to make payments to the IMF and European creditors.
Yet European leaders said Wednesday that Greece needs to promise greater economic reforms in return for the funds. They are demanding steep cuts to Greece's pensions, as well as higher sales taxes and larger budget surpluses.
Greek Prime Minister Alexis Tsipras has said he would make some concessions, but would not impose further pension cuts.
S&P said that money is flowing out of Greece's banks, which are dependent on the European Central Bank for financial support. Those outflows could ultimately force the country to block that money from leaving the country, the ratings agency said, precipitating an exit from the euro zone.
In addition, any agreement between Greece and its creditors in the next two weeks would likely only provide temporary relief, covering payments for the next three months, S&P said.