27 February 2012

S&P downgrades Greece to SD (Selective Default)

S&P's recovery rating of '4' on Greece's foreign-currency issue ratings is unchanged. S&P's country transfer and convertibility (T&C) assessment for Greece, as for all other eurozone members, remains 'AAA'.

Rationale

"We lowered our sovereign credit ratings on Greece to 'SD' following the Greek government's retroactive insertion of collective action clauses (CACs) in the documentation of certain series of its sovereign debt on February 23, 2012. The effect of a CAC is to bind all bondholders of a particular series to amended bond payment terms in the event that a predefined quorum of creditors has agreed to do so. 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. 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 'D'.

We do not generally view CACs (to the extent that they are included in an original issuance) as changing a government's incentive to pay its obligations in full and on time. However, we believe that the retroactive insertion of CACs will diminish bondholders' bargaining power in an upcoming debt exchange. Indeed, Greece launched such an exchange offer on February 24, 2012.

If the exchange is consummated (which we understand is scheduled to occur on or about March 12, 2012), we will likely consider the selective default to be cured and raise the sovereign credit rating on Greece to the 'CCC' category, reflecting our forward-looking assessment of Greece's creditworthiness. In this context, any potential upgrade to the 'CCC' category rating would i.a. reflect our view of Greece's uncertain economic growth prospects and still large government debt, even after the debt restructuring is concluded.

If a sufficient number of bondholders do not accept the exchange offer, we believe that Greece would face an imminent outright payment default. This is because of its lack of access to market funding and the likely unavailability of additional official financing. The revised financial assistance programme provided by most of the eurozone governments and the Stand-By Credit Arrangement with the International Monetary Fund are predicated on a successful exchange offer.

Our T&C assessment for Greece, as for all other eurozone members, is 'AAA'. A T&C assessment reflects our view of the likelihood of a sovereign restricting non-sovereign access to foreign exchange needed to satisfy the non-sovereign's debt-service obligations. Our T&C assessment for Greece expresses our view of the low likelihood of the European Central Bank restricting non-sovereign access to foreign currency needed for debt servicing.

If Greece were to withdraw from eurozone membership (which is not our base-case assumption) and introduce a new local currency, we would reevaluate our T&C assessment on Greece to reflect our view of the likelihood of the Greek sovereign and its central bank restricting non-sovereign access to foreign exchange needed for debt service. Contrary to the current case, in this scenario the euro would be a foreign currency, and the Bank of Greece would no longer be part of the European System of Central Banks. As a result, under our criteria, the T&C assessment can be at most three notches above the foreign-currency sovereign credit rating."

Press release

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