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Standard & Poor’s cut Greece’s long-term credit rating to selective default on Monday, a first for any euro-zone nation. The move was widely expected, as Standard & Poor’s said earlier this month it would consider Greece to be in default it it retroactively added collective-action clauses to its sovereign debt so as to force creditors to participate in a bond swap. Late last week, Greece’s parliament approved that measure.
The S&P move was “anticipated, planned for, and addressed by the European Council and the Eurogroup of finance ministers, according to a statement released by the Greek Finance Ministry. The ministry added that there were no reasons for concern that a “default” hurt Greek banks’ ability to access funding, and that banks that have in the past used their Greek government bond holdings as collateral for obtaining liquidity from the European Central Bank will now have their liquidity needs addressed by the European Financial Stability Facility, through the Bank of Greece.
Whether the bond swap or collective-action clauses will trigger payments on credit default swap contracts, which essentially act as insurance against a bond default, remains to be seen. The International Swaps and Derivatives Association said it would decide Wednesday on whether to consider requests to cover swap-related losses. Widespread CDS payments could ripple through the euro-zone financial system and exacerbate the debt crisis.
Greece is seeking to swap more than 200 billion euros in outstanding bonds for new debt, a move that is meant to not only lower borrowing costs, but bring down its long-term debt. The goal is to reduce the federal government’s debt load from 160 percent of gross domestic product to 120 percent of GDP by 2020. Greece is relying eavily on being able to get enough investors to participate in the swap. If too few agree to the swap, S&P said Greece would face imminent default, as it would have no access to lending markets.
A collective-action clause will help alleviate some of that risk by requiring all bond holders to participate in a bond exchange if a specified majority approve the measure. However, S&P said that just adding that clause to bonds, which Greece did retroactively, was enough to consider the terms of the bonds significantly altered, and thus to place them in selective default.
“As we have previously stated, we may view an issuer’s unilateral change of the original terms and conditions of an obligation as a de facto restructuring and thus a default by Standard & Poor’s published definition,” S&P sad in a statement. After the debt exchange is complete, S&P said it would likely rate the new bonds as triple-C, its rating on Greek debt before Monday’s downgrade.
Moody’s Investors Service and Fitch Ratings are expected to follow suit with their own downgrades once Greece proceeds with the debt restructuring. Fitch already said it will likely place Greece in selective default after the debt exchange, though only temporarily. Moody’s has yet to comment on whether it might cut its rating on Greek debt to default, though all three of the big ratings firms have said in the past that a debt exchange in which newly-issued bonds are not of equal or greater value than the old bonds would be considered default.
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