Fitch First To Downgrade Greece To Speculative Default As Greek CDS Tumble By Most Ever, Analysts Balk At Bailout

Tyler Durden's picture

Earlier today, Fitch announced it would be the first rating agency to declare Greece has defaulted, albeit on an interim basis. According to Reuters, Fitch Ratings will declare Greece in restricted default on its debt due to the steps taken in a new euro zone rescue package but will likely assign new ratings of a low speculative grade once a bond exchange is completed, the agency said on Friday. The agency said that the reduction in interest rates Greece is paying on its debts and extension of maturities gave it a chance of regaining solvency and would support its rating. "Fitch will assign new post-default ratings to Greece and to the new debt instruments once the default event is cured with the issue of new securities to participating bondholders," the agency said. "The new ratings will likely be low speculative-grade." Elsewhere, confirming that now that Greece is an explicit ward of the EFSF, read Germany and France its rating do not matter, Greek CDS tumbled the most ever, tightening by 500 bps to 1,500 in hours. However, since Greece now exists in a state of limbo when it comes to capital markets and since without the explicit support of the EFSF the country would be insolvent, there is little sense to look at its "risk" through the lens of fixed income any more. Lastly, as the following selection of analyst commentary indicates, there is nothing about this "solution" that is actually beneficial in the long run.

FxPro’s Simon Smith, chief economist and Michael Derks, chief strategist, in London: ‘‘Eventually, a forced default is still more likely than not. The euro will breathe a sigh of relief, but there’s little reason to party’’

Citigroup Inc.’s Valentin Marinov, a currency strategist in London: “The key issue is whether the current bailout will lastingly reduce investors’ concerns about debt sustainability in Greece and the euro zone periphery more generally. We think not’’

Morgan Stanley strategists led by Hans Redeker, head of foreign- exchange strategy in London: ‘‘What we did hear out of Brussels does not convince us that euro markets can remain stable for long. While the EFSF now has the flexibility required to deal with the challenges of protesting credit markets, the size of the EFSF has not been increased, leaving markets guessing how long it may take before this market-calming instrument may run out of funds’’

Bank of Tokyo-Mitsubishi UFJ Ltd.’s Lee Hardman, a currency strategist in London: ‘‘The plan falls short of achieving debt sustainability with debt to gross domestic product ratios for Greece, Portugal and Ireland still likely to remain comfortably above 100 percent. A continuation of solvency concerns will leave the door open for contagion fears to rebuild. Beyond the new bailout euphoria, relative economic fundamentals are turning against the euro with growth in the euro-zone slowing sharply’’

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Popo's picture

One should also note that Fitch is majority French owned.   This is a EUROPEAN ratings agency junking Greece.

wombats's picture

So when does the unwind/crash start for real?

Tortfeasor's picture

Why is this not triggering CDS to be paid out?

ZeroPower's picture

ISDA said this morning the agreement (key word somewhere: voluntary). From reuters this am, which started the rally:



Troy Ounce's picture


Some executive at ISDA threatened Jim Rickards recently. Is it this Geen guy? Or Richard Metcalfe? Someone else at Isda with a short fuse?

qussl3's picture

Because it doesnt matter what the rules are when you can change them.

i-dog's picture

Because they were not designed to be paid out on, just to be sold to punters. Rather similar to USTs and Greek bonds, really.

ZeroPower's picture

Ah, yes another conspiracy theory. How do you explain the fact that CDS do regularly pay out and settle, to wit: from the headlines today, Bank of Ireland is having an auction next week to settle their CDS as they did encounter a credit event.

Tyler Durden's picture

Regularly... except for systemically critical sovereign defaults.

ZeroPower's picture

Agreed - no sovereign CDSs yet in the Euro area... however a few years back Ecuador did default and i believe there was some CDS exposure outstanding.

Imminent Crucible's picture

We're not talking about a tiny Andean nation where El Presidente brawls with striking police, we're talking about Europe.  You missed i-dog's point, which was that THERE IS NO financial entity with the capital to make good on sovereign CDS, just as AIG didn't have remotely enough capital to cover the default swaps that Cassano wrote on Lehman debt.

You think E.M.U. leaders are sweating around the clock just because they enjoy perspiring?

ZeroPower's picture

His point, and your followup, is stupid and wrong. Do you think it's a country that nets out their obligations via CDS?


CDS is traded OTC and is MTM daily between market participants with a certain amount (depending on the issue) posted upfront. The rest is netted in an auction process which actually means the CDS sellers actually do receive a small portion back, depending on what worth of par the results come back at. Assuming you dont mean an all out world-wide default on CDS; then yes there should be no problem covering any margins left over.

And no, besides the Greeks right now, i dont think any other country's leaders are sweating right now - which is precisely the problem.

i-dog's picture

This thread is talking about Greek bonds -- sovereign debt -- not some CDS on Joe 6P's mortgage default. lol.

Greece won't default ... more money will be printed and handed to them, somehow! The US won't default ... Tiny Tim will print more, somehow! Meanwhile, the punters (pension funds, hedge funds) will keep paying the CDS premiums thinking that they are making an "investment".

Ghordius's picture

Which make sense.

Any critical sovereign default triggers an avalanche of CDS that has no direct financial link to the covered default.

ZH, I suspect you are all market purists, are you ever going to join in to the request to ban CDS in the present form?

If it's insurance, then it should be treated as such (stake in the game, less then game itself).

If it's gambling, then it should be treated as such (not for banks, sin tax, regulation, etc.)

If you are market purists of the kind that abhors sovereign defaults, then I'm sorry, this is the wrong planet.
Historically sovereign are bad debtors.

End of "get rid of idiotic financial instruments now" rant. ;-)

Tortfeasor's picture

Wait...what?  Bank of Ireland sold CDS on itself, is that what you're saying?  Who's dumb enough to buy credit protection from the same entity you're worried is going to default?

ZeroPower's picture

I have no insight into IREs own prop operations, my point was that they are the most recent entity to suffer a credit event w/r/t their CDS. When said credit event occurs, there is an auction process which determines what prices to pay (price as % of par). IRE auction is set for July 28th.

Iam_Silverman's picture

"Wait...what?  Bank of Ireland sold CDS on itself, is that what you're saying? "

I agree, that would be silly.  Sort of like "full faith and credit".....

"I have no insight into IREs own prop operations"

Wouldn't that be a knee-slapper to find their sole prop trading position was on CDS betting against their own banks solvency?

jmcadg's picture

Fitch bitchez!

Wait for the backlash from the German people, if it gets that far.

JOYFUL's picture

queue fat lady

Ethics Gradient's picture

Not quite yet, but there is a queue of fat ladies.

Sudden Debt's picture

As long as there are no real political changes combined with severe austerity plans AND ACTIONS, Greece is doomed to default.
With the current political atmosphere, it won't take long before they run their next deficits. So starting from jan. 2012, this shit will start all over again and now they'll drag down the sugar daddies and mommies with them.

qussl3's picture

Looking less and less likely that Greece will ever default, but more and more that the Germans will pay for everyone.

Wonder how long before Italy wants to get on the gravy train.

writingsonthewall's picture

I can see the EU plan - you leave the crisis until it reaches a point where you have to take action - then you cobble together a package to shut the markets up (for a while) - you keep doing this when you need to.....until growth and recovery come and there's a real prospect of payment by the Greeks (or any other PIIGS)


Unfortunately this is based on the false premise that a recovery is imminent. In 1929 the recovery took more than a decade to come - does anyone think the EU (and the Germans) have the legs for another 8 bailouts?

They don't stand a chance.


At least in 1929 there were some countries growing - who exactly is growing in 2011? and who is growing by enough to drag the rest of us up with them?


Whatever happened to China being the stimulus for world growth? - oh yes, rather than them pulling us up - we pulled them down.


You have to laugh - Herman Van-Rompey actually believes that this is a 'solution' - but it's not even a very good sticking plaster.

Sudden Debt's picture

We're not in the real crisis yet. We're still in damage control erea. The house of cards still needs to fall.


ZeroPower's picture

Classic example, yet again, of kicking the ouzo bottle down the road. Check out greek banks, spanish banks, french, ita; all higher. All the sovereigns you can think of are tighter in credit as well.

Ridiculous, but it had to happen.

Maybe in a few months there will be another catalyst, but it seems full blow crisis has been averted for now.

Sudden Debt's picture

That's mostly done by retail investors who don't care to see the total picture. I know some who still trade bank stocks and whenever you start talking about this whole spiderweb of debt they look to you like a deer in the spotlight and don't really care. Stocks are up, that's all what they care about and that's enough proof for them that everybody else is wrong.

And all that they've learned is : when stocks go down don't sell. there's always a guardian angel who pops up.

Untill they don't.


qussl3's picture

Bagholder conditioning 101.

slaughterer's picture

This whole episode will be re-run again in 2012.  Remember 2011 was a re-run of 2010.  Will take about a year before the SHTF in eurozone.  Do they hand out degrees in can kicking to modern politicians these days?  They are really skilled at it.  "So long as it does not happen while I am in office."  LOL.

Internet Tough Guy's picture

There never was a crisis in the euro, despite the ZH panicky headlines. Euro problems were always going to be worked out, unlike the dollar problems.

FOA (8/22/01)

The war between gold and the dollar has been over for a while now. The action, today, is between the dollar and the euro arena and this is what will break the price lock on gold.

Without an international floating gold reserve pricing, to balance against their devaluing debt reserve, the entire dollar banking system can only rely upon extreme dollar inflation to float its accounts. Price inflation will have to be ignored. To this end the group of dollar supporting countries, we refer to as the dollar faction, has locked itself into a box. It must find a way to float gold prices with a gold reserve that only drains away if world gold price rise.

AUD's picture

What's CDS on Germany saying?

slaughterer's picture

Skimming the German newspaper articles today, I was amazed at the lack of outrage at this plan.  Many of the articles are jubilatory that private involvement was agreed and that the leaders over-delivered.   Not much copy given to taxpayer costs and possible knock-on effects. 

ZeroPower's picture

~20bp tighter on core Germany, SovX (Western EU) also tighter to around 240 midpt

Bang Dae Ho's picture

Soon to be announced by the rating agencies:

- Default of The Roman Empire.

- Currency reform from Reichsmark to D-Mark completed. Outlook for the German economy positive.

- America Discovered, instead of a sea passage to India.

Roger Knights's picture

The more air they pump into this bubble, the bigger the ultimate pop.

Bang Dae Ho's picture

in a large enough bubble, there is still room for a lot of ponzi.

HITMAN56's picture

ISDA out with some comments...."shouldnt trigger"

slaughterer's picture

Well, the whole deal has to pass the different nation-state congresses, where it will be criticized to death by the opposition.  Wait until September.  ;-)

TradingJoe's picture

Given the outstanding global debt, very few countries out there are SOLVENT! Rest is