S&P said the partial default will occur once European officials push through a plan that will see bondholders foot part of the bill for a second Greek bailout agreed to last week in Brussels. The rating company also lowered its ranking for Greece to CC, two steps above default, from CCC and said the outlook on the debt is negative, according to a statement published in London yesterday.
“The proposed restructuring of Greek government debt would amount to a selective default under our rating methodology,” S&P said. “We view the proposed restructuring as a ‘distressed exchange’ because, based on public statements by European policy makers, it is likely to result in losses for commercial creditors.”
EU leaders agreed last week that bondholders will contribute 50 billion euros ($72 billion) to a new rescue package, with euro-region governments and the International Monetary Fund putting up a further 109 billion euros. The July 21 accord strengthened the region’s bailout mechanism to offer protection to other euro-region nations such as Ireland and Spain to avert contagion.
“The risk of default at those levels is pretty inevitable,” said Vincent Truglia, managing director at New York-based Granite Springs Asset Management LLP and a former head of the sovereign risk unit at Moody’s Investors Service. “You’re going to get, at the minimum, a distressed exchange. Greece will become a serial defaulter because the amount of debt reduction that’s proposed is not really adequate.”
The euro fell 1 percent to $1.4369 late yesterday in New York, after the S&P announcement.
Greece hired BNP Paribas SA, Deutsche Bank AG and HSBC Holdings Plc to act as joint dealer-managers of its voluntary bond exchange and debt-buyback plan, the Athens-based Finance Ministry said in a statement. The lenders will provide a committed financing facility to Greece, the ministry said.
S&P’s move followed Moody’s Investors Service, which on July 25 cut Greece’s long-term credit rating by three steps to Ca, its second-lowest rating. Fitch Ratings cut Greece by three levels to CCC on July 13.
The cost of insuring against a default by Greece was at 1,695 basis points yesterday, implying a 76 percent chance the government will fail to pay its debts within five years. The price of the contracts soared to a record 2,568 basis points on July 18, when the probability of default approached 90 percent, according to CMA.
Not a ‘Big Shock’
“There hasn’t been a big shock to the market as it’s mostly water under the bridge,” said David Keeble, head of fixed income strategy at Credit Agricole Corporate & Investment Bank in New York. “I think the market is prepared for the next step, which is selective default and which should happen in a month or so.”
S&P said its recovery rating of ‘4’ for Greece remained unchanged, signaling an estimated 30 percent to 50 percent recovery of principal by bondholders, including on bonds subject to a 20 percent reduction in net present value as estimated under the Institute for International Finance’s proposal.
Under the EU’s second rescue program for Greece in 15 months, banks will voluntarily write down the value of their bonds by 21 percent as part of the exchanges, the IIF, which represents banks and insurers, said July 22. The plan will lengthen the average maturity of privately held Greek debt to 11 years from six years.
S&P, in a separate report, said some provisions of the EU’s rescue plan would help protect Ireland and Portugal.
“We think these maturity extensions and interest-rate reductions should be beneficial for the debt sustainability of both Ireland and Portugal,” S&P said.
S&P assigns a selective default when it decides a borrower has defaulted on a specific class of obligations yet will likely meet other payment obligations in a timely manner.
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