S&P Lowers Greece's Credit Rating to 'Selective Default,' Making It the Lowest Country in S&P's Rankings

Greece Falls to S&P's Lowest Rated, Default Warned

June 13, 2011

Reuters – Greece became the lowest-rated country in the world according to Standard & Poor's, which downgraded it on Monday and warned that any attempt to restructure the country's debt would be considered a default.

Greece now has a lower credit rating than countries such as Pakistan and Ecuador, which has been shut out of international markets since a 2009 default. The cost of insuring Greek debt is now almost twice as much as the price of insuring Pakistani bonds.

S&P's move was the latest blow for Greece's Socialist government, which is scrambling to push an unpopular austerity package through parliament to ensure continued funding under a year-old bailout plan.

Barely a year after Athens was granted a first 110-billion-euro (158-billion-dollar) aid package, the European Union, the IMF and the European Central Bank are working on a second funding deal. Some European countries such as Germany oppose giving more money to Greece without the assistance of private creditors.

S&P said European policymakers looked increasingly likely to impose a restructuring of Greece's debt -- either via a bond swap or by extending bond maturities -- as a means of making the private holders of Greek bonds share the burden.

"In our view, any such transactions would likely be on terms less favorable than the debt being refinanced, which we, in turn, would view as a de facto default according to Standard & Poor's published criteria," the agency said.

In such a case, S&P said, Greece's credit rating would be lowered to "selective default," or SD, while the ratings on the country's debt instruments would be cut to D.

It cut Greece's long-term sovereign credit rating to CCC, four steps away from default, from B. The short-term rating was affirmed at C and all ratings were removed from credit watch.

The move takes S&P's rating of Greece one notch below Moody's Caa1, while Fitch ranks Greece at B-plus. This makes Greece the lowest country in S&P's rankings.

S&P said the outlook on the long-term rating remained negative, a sign that another downgrade is likely in the next 12 to 18 months. S&P said it will probably downgrade the ratings of four Greek banks as well -- National Bank of Greece, EFG Eurobank Ergasias, Alpha Bank, and Piraeus Bank. All of them are currently rated B.

GREECE'S WILL TO STAY IN EURO

Greece said the move by Standard & Poor's overlooked its commitment to carry on with tough fiscal efforts to repair public finances and remain a member of the 17-member euro currency club.

"The decision also overlooks the government's moves to avoid any problems relating to Greece's contractual obligations, as well as the will of all Greeks to plan our future inside the euro zone," the Finance Ministry said in a statement.

Several international banks have come out publicly in favor of rolling over their holdings of Greek debt, including France's Credit Agricole, which owns Greek bank Emporiki.

Germany's banking association said on Saturday it backed the idea of private creditors participating in the rescue.

The banks' participation would be part of a second bailout for Greece worth around 120 billion euros aimed at giving Athens more time to tackle its 340-billion-euro debt load, under the assumption that it will not be able to borrow on international markets this year or next.

Concerns that a second rescue may trigger a credit event drove the cost of insuring Greek government debt against default to a record high of 1,600 basis points on Monday.

Five-year credit default swaps (CDS) on Greek government debt rose 58 bps on the day to 1,600 bps, according to data monitor Markit, meaning it cost 1.6 million euros to protect 10 million euros of exposure to Greek bonds. By comparison, Pakistan's five-year CDS were trading around 880 bps.

The euro pared gains against the dollar and the U.S. stock market briefly turned negative after the downgrade. Brent crude oil also fell after the move increased investors' nervousness over the economy and oil demand.

There are differences between the leaders of European Union states and the ECB, which remains opposed to private sector involvement in any Greek debt restructuring, saying it may set off a chain reaction in financial markets that would undermine the credit-worthiness of other stressed euro zone sovereigns.

EU leaders will discuss a new deal at a June 23-24 summit.

Ben May, an economist at London-based Capital Economics, said he did not see the S&P downgrade as having a material impact on the timing of a new funding package.

"We believe some form of a second bailout package will be in place to avoid a disorderly default," he said.

After failing to meet fiscal targets under the first bailout deal the government, which is trailing the conservative opposition in opinion polls, has decided to raise taxes and slash spending more than planned this year to avoid default.

The prospect of more austerity and rising unemployment has fueled 20 days of protests in central Athens with a big general strike planned for Wednesday, challenging the government as its new package is headed for parliament for a vote.