Alexander Higgins February 28, 2012:
Just hours ahead of the European market opens, S&P has become the first major ratings agency to declare Greece to be in the dreaded state of default.
For months now politicians and bankers have been screwing over the public by jamming spending cuts and massive tax increases up the ass of the people of Greece to avoid a default which analysts have repeatedly warned could lead to widespread debt contagion throughout the world culminating it what has been labeled as nothing short of financial Armageddon.
Despite widespread civil unrest in the form of protests and rioting, in Greece and throughout the entire Eurozone, over the austerity measures being forced into place to prevent sovereign debt default, Greece has entered the much dreaded state of default.
Greece’s credit rating was cut to selective default by Standard & Poor’s after the bell on Monday, reflecting the implementation of collective action clauses (CACs) on its debt. Greece is in the middle of one of the largest sovereign debt restructurings ever and needs to secure significant private sector participation rate; CACs are designed to forcibly increase that rate.
According to S&P, the Greek government retroactively inserted CACs into the documentation of certain series of its sovereign debt on February 23, two days after the Troika agreed on the terms for a second bailout package. This retroactive implementation substantially changed the terms of the deal and diminished investors’ bargaining power in the face of a restructuring, causing the downgrade, S&P said.
Greece needs to fulfill certain conditions in order to receive the next tranche of money and avoid a disorderly default. Among those is the successful implementation of the so-called PSI (private sector involvement) deal, which is supposed to be voluntary. In practice, Greece is executing a bond restructuring that will see bondholders take an approximately 70% haircut on the net present value of their bonds while the average maturity will be significantly extended, reducing shorter-term funding requirements.
For the PSI to succeed, the Troika (made up by the EU Commission, the ECB, and the IMF) is expecting Greece to secure the participation of 95% of private bondholders. Experts at Barclays believe Greece could come short, and thus would use retroactive CACs that could require a 66% participation rate to force all bondholders to take the deal.
“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,” read S&P’s post-market release.
Consummation of the debt exchange would result in a credit upgrade, S&P announced, and would take Greece’s credit rating to CCC. “In this context, any potential upgrade to the ‘CCC’ category rating would inter alia reflect our view of Greece’s uncertain economic growth prospects and still large government debt, even after the debt restructuring is concluded.” The Financial Times reports:
The finance ministry said the downgrade was “pre-announced and all its consequences have been anticipated, planned for and addressed” by eurozone partners who are backing Greek efforts to avoid a disorderly default.
A successful completion of the debt restructuring would clear the way for Athens to receive a second €130bn bail-out from international lenders, in return for implementing a fresh round of fiscal and structural reforms. Greece would remain in selective default until its debt swap offer closes on March 12 for a majority of bondholders, but “upon completion of the PSI, the sovereign is expected to be re-rated upwards,” the ministry said.
S&P said the downgrade followed the retroactive insertion by Athens of a “collective action clause” forcing all bondholders to accept the terms of the deal put forward by the government for bonds issued under Greek law.
The Greek move “constitutes the launch of what we consider to be a distressed debt restructuring … we believe the retroactive insertion of CACs will diminish bondholders’ bargaining power in an upcoming debt exchange,” it said.
Source: The Financial Times
Press TV reports:
Greece downgraded to selective default
Greece’s move “constitutes the launch of what we consider to be a distressed debt restructuring,” the US ratings agency said on Monday.
Greece has become the first eurozone member in its 13-year history to be officially rated in default, down from its previous rating of ‘CC’.
However, S&P said that once the debt swap is concluded, it will likely raise Greece’s sovereign credit rating to the ‘CCC’ category.
Greece has negotiated the biggest debt restructuring in history as it seeks to reduce national debt to 120 percent of gross domestic product by 2020, from 160 percent last year, and to meet the terms of a 130-billion-euro ($170 billion) international bailout.
The private sector involvement entails a “debt swap” which aims to slice 100 billion euros off more than 200 billion euros of privately held debt if all investors participate.
The Greek government said the move was expected and would not hurt the banking industry.
“This rating does not have any impact on the Greek banking system since any likely effect on liquidity has already been dealt with by the Bank of Greece,” the Greek Finance Ministry said in a statement issued on Monday.
Greece has the highest debt burden in proportion to the size of its economy in the 17-nation eurozone. Despite austerity measures and the bailout funds, the country has been in recession since 2009.