S&P cuts Greek sovereign rating to 'selective default'

Tuesday, February 28, 2012

London - Standard & Poor's cut Greece's "CC" long-term and "C" short-term sovereign credit ratings on Monday to "selective default"(SD) after the debt-laden country launched a bond swap plan to ease its debt burden last Friday.

The rating agency attributed its rating decision mainly to the Greek government's retroactive insertion of collective action clauses (CACs) in the debt swap deal, a legislation Greece has passed to force all private bondholders to participate in the swap.

"In our opinion, Greece's retroactive insertion of CACs materially changes the original terms of the affected debt and constitutes the launch of what we consider to be a distressed debt restructuring," S&P said in a statement.

"Under our criteria, either condition is grounds for us to lower our sovereign credit rating on Greece to 'SD' and our ratings on the affected debt issues to 'Default'," the rating agency added.

S&P noted that Greece's decision to add CACs into the debt reduction programme was equal to a debt issuer's "unilateral change of the original terms and conditions of an obligation", something it viewed as a "de facto restructuring and thus a default".

While stating that it does not generally view CACs as changing a government's incentive to pay its obligations in full and on time, S&P said it believes that Greece's decision will "diminish bondholders' bargaining power in an upcoming debt exchange".

The rating agency also forecast "an imminent outright payment default" if a sufficient number of bondholders do not accept the exchange offer.

"This is because of its lack of access to market funding and the likely unavailability of additional official financing," it added.

Greece formally launched the bond swap programme last Friday, under which bondholders are to take losses of 53.5% on the nominal value of their Greek bonds, with actual losses put at around 75%.

The S&P move also came hours after the German parliament approved a second bailout, including 130 billion-euro (about 174 billion US dollars) loan, for Greece as part of Europe's effort to keep indebted Greece out of bankruptcy.

Meanwhile in a prompt response shortly after the S&P move, the Greek Finance Ministry said early on Tuesday that the latest downgrade of Greece's credit rating to "selective default" has no impact in the banking sector.

"As expected, S&P has proceeded to downgrade Greece to 'SD' and the list of PSI eligible securities to 'D' following the CACs legislation onto Greek Law Bonds and the launch of the large scale voluntary PSI offer," the ministry said in a press release.

"The downgrade has no impact in the Greek banking sector as its liquidity effect has been addressed by the Bank of Greece, and consequently by the EFSF (European Financial Stability Facility)," stressed the ministry.

The Greek sovereign will remain in "SD" rating while the PSI offer is open and upon completion of the PSI, the sovereign is expected to be re-rated upwards, said the ministry.