S&P – It’s a default

This morning I said we were waiting for ratings, and I said on my later post that it all hinges on the rating agencies.

Tonight they have spoken and it would seem that the Greek crisis is far from over.

Two rollover proposals being touted for Greek debt would amount to a selective default, ratings agency Standard & Poor’s warned on Monday, tempering hopes for a resolution to the long-running saga.

The euro slipped on the dollar in Asian trading after S&P said that two recent plans for debt relief floated by Federation Bancaire Francaise (FBF) would count as “distressed” and involve losses to the debt holders.

“If either option were implemented in its current form, absent other mitigating information, we would likely view it as constituting a default under our criteria,” S&P said.

“In that event, we would likely lower Greece’s issuer credit rating to ‘SD’, indicating that it had effectively restructured some, but not all, of its bond debt.”

The agency cut Greece’s sovereign rating to CCC last month, from B, on a view that any restructuring of the country’s massive debt load would count as an effective default.

S&P’s warning is a reality check for markets that had hoped for real progress after Greece passed austerity laws last week to secure another tranche of European Union aid.

S&P said if either of the FBF plans was put in place, it would also assign a ‘D’ rating to the maturing Greek government bonds upon their refinancing in 2011.

But, once either option is implemented, we would assign a new issuer credit rating to Greece after a short time reflecting our forward-looking view of Greece’s sovereign credit risk,” S&P added.

It would also likely rate all debt issues, including debt refinanced between 2011 and 2014 under the FBF options, at the same level as Greece’s new issuer credit rating.

“Regardless of whether the current FBF proposal is implemented, however, we continue to believe the Hellenic Republic’s uncertain ability to implement the revised EU/IMF program is a key risk weighing on its credit standing,” said S&P.

That certainly reads like a “back to the drawing board” to me. The ECB’s policy is that they will not accept sovereign bonds with a default rating as collateral, which is why everyone involved is trying to work out a way of defaulting without defaulting.

The raters have given their preliminary verdict so let’s see who blinks first. The rating agencies, the ECB, the French and German banks or some other counter-party.

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  1. A technicality. Of course it’s a default. But it has another name! But no-one wants this to go anywhere and the ratings agencies are actively seeking redemption post 2008. What comes of it will be interesting.

  2. Jumping jack flash

    Bound by the system. if they let Greece off, the system is worthless, if Greece defaults there will be major trouble.

    Debt always requires repayment in full plus interest.

    • Montgomery Burns

      Bound by the system. if they let Greece off, the system is worthless, if Greece defaults there will be major trouble.

      but good for Greece.

      Debt always requires repayment in full plus interest.

      No it doesn’t. At the sub-national level there is bankruptcy. At the national level there is default. In other words debt can and does get written off.

  3. Interesting how past defaults such as Greece and Argentina where fine little hype but now. Shows either it is a beat up or it really is that bad.

  4. Its the structure of the ECB that is the problem, Greece by itself is nothing, its the other larger debtor nations that has everyone worried. The contagion effect.

  5. They’ll call it re-positioning = re-structure = default, because the bond holders won’t get 100% of their money back.

    Also, I’m not convinced the rating agencies deal equally will sovereign nations, and while the debt/GDP of the US is less, they are in a privileged position with the world reserve currency, and a monetary ability to absorb debt..QE etc.

    • One other issue the rating agencies are paid by the bond holders, so not exactly independent outcome.

    • They are a proxy for what is going on. People know they are dodgy and in the hands of the people that are meant to be relying on their ratings…but people know when the agencies actually are worried, then it must be getting pretty bad!

  6. Pay the financial tribune/extortion or the “Kontagion Kraken” wil be released.

    We don’t care where the booty comes from-ECB, US FED, China,etc.

    Signed: The Financial Mercenary Armies of the West.

    The Roman Empire was nothing more than the mafia with an engineering degree.

    The Anglo Empire is another mafia with a finance/derivative degree.

  7. Greece will eventually default, the only question is ‘when’.

    There is a great article on Financial Times about how the Greek ‘bailout’ is really a CDO. I especially love the quote :

    “If this was any other field of human activity you would go to jail if you accepted, let alone made, such an indecent offer.”

    You can read the article on business spectators (registration required).


  8. I liked this one from Sayce on Money Morning today,,,


    ‎”It’s funny; the ratings agencies are finally doing their job. That is, properly rating the creditworthiness of borrowers. And right now Standard & Poor’s, Moody’s and Fitch say Greece sucks. Yet governments are up in arms because the ratings agencies won’t play the game anymore. Even though they criticised the agencies for dodgy mortgage-backed securities ratings.”

    • It’s a bit of a “market vs Statism” scenario, sin’t it?

      The powers that be won’t like that very much – the pollies are used to the financial system playing the game.

      What’s next?