Greece Downgraded From BB- To B As S&P Believes More Than 50% Principal Debt Reduction Would Be Required

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From S&P:

Overview

  • Under our sovereign ratings criteria, a commercial debt rescheduling typically constitutes a default.
  • In our view, there is increased risk that Greece will take steps to restructure the terms of its commercial debt, including its previously-issued government bonds.
  • Accordingly, we are lowering both the long- and short-term ratings on Greece to 'B' and 'C', respectively.
  • We are leaving both ratings on CreditWatch Negative.

Rating Action

On May 9, 2011, Standard & Poor's Ratings Services lowered its long- and short-term sovereign credit ratings on the Hellenic Republic (Greece) to 'B' and 'C', from 'BB-' and 'B', respectively. Both the long- and short-term ratings remain on CreditWatch, with negative implications, where they were first placed on Dec. 2, 2010, and March 29, 2011, respectively. On May 9, 2011, Standard & Poor's '4' recovery rating for Greece remains unchanged--indicating an estimated 30%-50% recovery upon default- and its 'AAA' transfer and convertibility assessment for Greece, which applies to all members of the eurozone, also remains unchanged.

Rationale

The downgrade reflects our view of increasing sentiment among Greece's key eurozone official creditors to extend the debt payment maturities of their €80 billion of bilateral loans pooled by the European Commission. As part of such an extension, we believe the eurozone creditor governments would likely seek "comparability of treatment" from commercial creditors in the form of their similarly extending bond and loan maturities.

Such private sector burden sharing would likely constitute a distressed exchange according to our criteria, for which we assign a rating of 'SD' for selective default. Even if there were no discount of principal, such an extension of maturities is generally viewed to be less favorable to commercial creditors than repayment according to the original terms of the debt.

Standard & Poor's sovereign ratings address the capacity and willingness of a sovereign to pay its commercial debt. A rescheduling of official debt that left commercial debt untouched would not constitute a default under our criteria but would likely signal declining creditworthiness.

In Standard & Poor's statement on Greece on March 29, 2011, we said that we could lower our ratings on the Republic if either the 2010 final budgetary outcome or 2011 fiscal performance fell below our expectations. In fact, Greece missed its 2010 fiscal target (10.5% of GDP outturn versus 9.6% target) and achieving the 2011 target is uncertain. We believe that many of Greece's eurozone official creditors have concluded that the ensuing higher projected Greek government borrowing requirements have reduced the likelihood that the Greek government will be able to return to commercial markets for medium- and long-term issuance later this year or early next year as originally planned. Accordingly, they may see a restructuring of official and commercial debt as the best way forward.

Although an extension of maturities with no principal discount would likely imply a recovery greater than 50%, our projections suggest that principal reductions of 50% or more could eventually be required to restore Greece's debt burden to a sustainable level, given trend growth potential of the Greek economy.

CreditWatch

Standard & Poor's intends to resolve its CreditWatch action within the next three months. If we perceive that the likelihood of a distressed exchange has increased further, the ratings could be lowered again. Conversely, if Greece's eurozone partners exempt commercial creditors from comparability of treatment while extending maturities on their official debt, then our ratings on the Hellenic Republic could stabilize at the current levels.