June 14, 2011

S&P Cuts Greece’s Rating to World’s Lowest

Fear that new rescue package will result in a ‘selective default’

Greece on Monday was dealt a harsh blow by rater Standard & Poor's, which saddled the country with a credit rating lower than that of Pakistan—in fact, the lowest national credit rating in the world. The move came as Greece was working toward yet another rescue package that ratings agencies fear will include involuntary restructuring of some of its debt: in other words, a default.

Reuters reported Tuesday that the costs of insuring Greece's debt at a bond auction of 6-month T-bills rose again in the wake of the S&P rating, adding 8 basis points to reach 4.96% compared to its last auction in May. The bid-to-cover ratio was only 2.58 compared with 3.58 in that last sale, and foreign investors took 37% of the offerings—more than at the last auction, in which they only took 34.2% of the amount available.

Ratings agencies and creditors alike fear that the new rescue package in the works will include some sort of restructuring, whether through a swap of bonds or prolonging existing bond maturity dates. That would mean private investors in Greek bonds will be compelled to share losses with the taxpayers who so far have been the ones to finance the bailouts.

Of that possibility, S&P said it looked increasingly likely. Therefore, it said in a statement, "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." That would result in the agency lowering the country's credit rating to "selective default," or SD, and bond ratings would be cut to D.

S&P slashed Greece's long-term sovereign credit rating to four steps away from default at CCC; that is from its former B rating. The short-term rating was affirmed at C and all ratings were removed from credit watch.

This means that Greece's S&P rating is its lowest, now one notch below Moody's Caa1; Fitch ranks Greece at B-plus. Greece is now the lowest country in S&P's rankings. S&P added that the long-term rating outlook remained negative; that means its likely S&P will further downgrade Greece in the next 12 to 18 months.

S&P also said it will likely downgrade four Greek banks' ratings as well. Currently the National Bank of Greece, EFG Eurobank Ergasias, Alpha Bank, and Piraeus Bank are all currently rated B.

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