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.