Greece has become the lowest-rated country in the world, according to Standard & Poor’s, which downgraded the country yesterday (13 June) and warned that any attempt to restructure its debt would be considered a default. The burning issue will be discussed at an emergency meeting of EU finance ministers on 14 June.
Greece, which has been shut out of international markets since a 2009 default, now has a lower credit rating than countries such as Pakistan and Ecuador. The cost of insuring Greek debt is now almost twice as high as the price of insuring Pakistani bonds.
It cut Greece’s long-term sovereign credit rating to CCC, four steps away from default, from B. The short-term rating was affirmed at C and all ratings were removed from credit watch.
The move takes S&P’s rating of Greece one notch below Moody’s Caa1, while Fitch ranks Greece at B-plus. This makes Greece the lowest country in S&P’s rankings.
S&P’s move was the latest blow to Greece’s socialist government, which is scrambling to push an unpopular austerity package through parliament to ensure continued funding under a year-old bailout plan.
Restructuring draws near
S&P said European policymakers looked increasingly likely to impose a restructuring of Greece’s debt – either via a bond swap or by extending bond maturities – as a means of making private holders of Greek bonds share the burden (see ‘Background’).
“In our view, any such transactions would likely be on terms less favourable than the debt being refinanced, which we, in turn, would view as a de facto default according to Standard & Poor’s published criteria,” the agency said.
Berlin is pushing hard for commercial banks to contribute to the cost of any new Greek bailout package, but is struggling to convince the European Central Bank and ratings agencies that this can be done without triggering a credit default.
In such a case, S&P said, Greece’s credit rating would be lowered to “selective default,” or SD, while the ratings on the country’s debt instruments would be cut to D.
EU finance ministers will hold an emergency meeting on Monday (14 June) to assess the situation.
Dutch Finance Minister Jan Kees de Jaeger said on Monday that the private sector must offer a “substantial” contribution to any new financing for Greece, throwing further weight behind Germany’s calls for a rollover of Athens’ debt.
S&P said the outlook on the long-term rating remained negative, a sign that another downgrade is likely in the next 12 to 18 months.
S&P said it will probably downgrade the ratings of four Greek banks as well – the National Bank of Greece, EFG Eurobank Ergasias, Alpha Bank and Piraeus Bank. All of them are currently rated B.
Greek says will to stay in euro
Greece said the move by Standard & Poor’s overlooked its commitment to carry on with tough fiscal efforts to repair public finances and remain a member of the 17-member euro currency club.
“The decision also overlooks the government’s moves to avoid any problems relating to Greece’s contractual obligations, as well as the will of all Greeks to plan our future inside the euro zone,” the Finance Ministry said in a statement.
Several international banks have come out publicly in favour of rolling over their holdings of Greek debt, including France’s Crédit Agricole, which owns Greek bank Emporiki.
Germany’s banking association said on Saturday it backed the idea of private creditors participating in the rescue.
The banks’ participation would be part of a second bailout for Greece worth around €120 billion aimed at giving Athens more time to tackle its €340-billion debt load, under the assumption that it will not be able to borrow on international markets this year or next.
Concerns that a second rescue may trigger a credit event drove the cost of insuring Greek government debt against default to a record high of 1,600 basis points on Monday.
Five-year credit default swaps (CDS) on Greek government debt rose 58 bps on the day to 1,600 bps, according to data monitor Markit, meaning it cost 1.6 million euros to protect 10 million euros of exposure to Greek bonds.
By comparison, Pakistan’s five-year CDS were trading around 880 bps.
The euro pared gains against the dollar and the US stock market briefly turned negative after the downgrade. Brent crude oil also fell after the move increased investors’ nervousness over the economy and oil demand.
There are differences between the leaders of European Union states and the European Central Bank, which remains opposed to private sector involvement in any Greek debt restructuring, saying it may set off a chain reaction in financial markets that would undermine the credit-worthiness of other stressed euro zone sovereigns.
EU leaders will discuss a new deal at a 23-24 June summit.
Ben May, an economist at London-based Capital Economics, said he did not see the S&P downgrade as having a material impact on the timing of a new funding package.
“We believe some form of a second bailout package will be in place to avoid a disorderly default,” he said.
After failing to meet fiscal targets under the first bailout deal the government, which is trailing the conservative opposition in opinion polls, has decided to raise taxes and slash spending more than planned this year to avoid default.
The prospect of more austerity and rising unemployment has fueled 20 days of protests in central Athens with a big general strike planned for Wednesday, challenging the government as its new package is headed for parliament for a vote.