Greece was warned it could receive a lower credit rating from Standard & Poor’s as proposed European Union rules threaten to hurt bondholders.
Greece’s ‘BB+’ long-term sovereign rating was placed on “CreditWatch” with negative implications, Standard & Poor’s Ratings Services said in a statement today from Madrid. S&P said it is assessing credit implications of the so-called European Stability Mechanism that may govern European Union sovereign bonds beginning in July 2013.
“Assigning ‘preferred creditor’ status to future official lending via the ESM could be detrimental to the ability of non-official holders of sovereign debt to be repaid,” S&P said.
The possible cut by S&P “is simply an indication of tightening liquidity conditions there and growing uncertainty about Greece and other front-line European countries’ ability to handle their debt loads,” said Gary Schlossberg, senior economist at Wells Capital Management Inc. in San Francisco.
“It is also an indication of the questions that remain about how sufficient official rescue packages will be,” Schlossberg said. “There’s a real risk that Europe’s crisis will get a bit worse before it gets better.”
S&P cut Ireland’s debt rating two steps on Nov. 23 and said this week it placed Portugal’s long-term and short-term foreign and local currency sovereign credit ratings on “CreditWatch” with “negative implications,” reflecting its inability to reduce its current-account deficit.
The EU in October agreed on the need to set up the ESM as a permanent crisis mechanism to safeguard the financial stability of the euro area as a whole. The Eurogroup, comprising the finance ministers of the 16 nations sharing the euro, said in a statement on Nov. 28 that “an ESM loan will enjoy preferred creditor status, junior only” to the loan from the International Monetary Fund.
Greece in May got a three-year aid package of 110 billion euros ($145 billion) from the euro area and the IMF to prevent a debt default.