It looks like S&P has just fired the first retaliatory shot at the EU in response to Trichet's unpleasant comments about the dollar over the weekend.
Overview
- In our view Greece is increasingly likely to restructure its debt in a manner that, under the conditions of any package of additional funding provided by Greece's official creditors, would result in one or more defaults under our criteria.
- We are also of the view that risks for the implementation of Greece's EU/IMF borrowing program are rising, given Greece's increased financing needs and ongoing internal political disagreements surrounding the policy conditions required by Greece's partners.
- Accordingly, we have lowered Greece's long-term rating to 'CCC', while affirming its 'C' short-term rating and removing the ratings from CreditWatch. The outlook is negative.
- The 'AAA' transfer and convertibility assessment for Greece, which applies to all members of the eurozone, is unchanged.
- Our recovery rating of '4' for Greece also remains unchanged, indicating an estimated 30%-50% recovery of principal by bondholders. We have revised our recovery rating base case default scenario for Greece to incorporate two hypothetical restructurings: an extension of maturities, followed by principal "haircuts".
On June 13, 2011, Standard & Poor's Ratings Services lowered its long-term sovereign credit ratings on Greece to 'CCC' from 'B'. The short-term rating was affirmed at 'C'. The ratings were removed from CreditWatch. The outlook on the long-term ratings is negative.
Standard & Poor's '4' recovery rating for Greece remains unchanged--indicating an estimated 30%-50% recovery upon default--and its 'AAA' transfer and convertibility assessment for Greece, which applies to all members of the eurozone, also remains unchanged.
Rationale
The downgrade reflects our view that there is a significantly higher likelihood of one or more defaults, as defined by our criteria relating to
full and timely payment, linked to efforts by official creditors to close an emerging financing gap in Greece. This financing gap has emerged in part because Greece's access to market financing in 2012 and possibly beyond, as envisaged in the current official EU/IMF program, is unlikely to materialize.
This lack of access, in our view, creates a gap between committed official financing and Greece's projected financing requirements. Greece has heavy near-term financing requirements, with approximately €95 billion of Greek government debt maturing between now and the end of 2013 along with an additional €58 billion maturing in 2014.
Moreover, the downgrade reflects our view that implementation risks associated with the EU/IMF program are rising, given the increasingly complicated political environment in Greece coupled with its current difficult economic climate.
In Standard & Poor's May 9, 2011 press release on Greece, we stated that we could lower our long-term rating further if we concluded that risk of a distressed debt exchange had increased. While we believe that official eurozone creditors are likely to provide additional funding to help close the emerging financing gap, based on recent statements made by the German government ahead of the June 20, 2011 Eurogroup meeting, we believe some official creditors will see restructuring of commercial debt as a necessary condition to such additional funding. We believe that private sector burden sharing could take the form of a debt exchange offer or an extension of debt maturities. 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. In that event, under our criteria, this would result in the rating on the affected instruments being lowered to 'D,' while Greece's credit rating would be lowered to 'SD'(selective default). We are also of the view that, even if official creditors do not adopt this approach at the next Eurogroup meeting, the likelihood of such an action over the next year has increased materially.
In our view, the continuing recession in Greece (with unemployment rising to 16.2% in March 2011, up from 11.6% in March 2010) partly explains the weaker-than-planned budgetary performance so far this year, which has yet to be addressed by the Greek government. We believe that this slippage is also to some extent due to the absence of broad political consensus supporting additional budgetary adjustments. As a result, we think that the execution risks of Greece's EU/IMF borrowing program have increased. We still expect that the Greek government will work to achieve this year's budgetary targets and start implementing the revised medium-term program agreed to with official creditors. However, we also believe that the recession could well persist into 2012 and thus may further erode internal political support for the revised EU/IMF program.
While we have lowered our long-term ratings on Greece to 'CCC', we have maintained a recovery rating of '4,' reflecting our estimation of "average" (30%-50%) recovery for holders of Greek government debt in case of default. However, we have revised our rating recovery base case default scenario for Greece to incorporate two hypothetical debt restructurings: the first (possibly occurring within the next 12 months as implied by the 'CCC' long-term rating), featuring an effective extension of Greece's debt maturities; followed by a second hypothetical restructuring (possibly occurring by 2013), incorporating principal "haircuts" with the aim of placing Greece's public debt burden, which by our estimate could then exceed 160% of GDP, on what the government and its official creditors might consider to be a more sustainable footing.
Outlook
Greece's 'CCC' long-term credit rating reflects Standard & Poor's view that the risk of default under our criteria for full and timely payment within the next 12 months has increased significantly. Our negative outlook indicates that a downgrade to 'SD' could occur if Greece undertakes one or more debt restructurings or maturity extensions on terms that constitute distressed debt exchanges as defined by our criteria.
Conversely, if Greece's eurozone partners agree on a revised EU/IMF program that does not result in a default under our criteria for full and timely
payment and the revised EU/IMF program is complied with, our ratings on Greece could stabilize at the current 'CCC' levels, even taking into account the risk of a debt restructuring in the form of a principal "haircut" by 2013.
