Greece's financial difficulties escalated yesterday after it was warned of a possible credit rating downgrade and Jean-Claude Trichet, European Central Bank president, said Athens would have to act “courageously” to bring its budget under control.

Interest rates on Greek bonds surged back close to their highest levels for seven months after Standard & Poor's put Greece's A minus credit rating on “negative watch”, which usually leads to a downgrade within a month.

Separately, Mr Trichet hinted that action taken by the new Greek government was not yet enough to bring the crisis under control. Calling Greece's situation “very difficult”, he told the European parliament “we all know the very important and courageous decisions that will have to be taken”.