Greece edges towards credit event

Over the weekend Moody’s caught up to the rest of the rating agencies with a re-rating of Greece due to the pending restructure:

Moody’s Investors Service on Friday downgraded Greece’s sovereign-debt rating to its lowest possible rating short of default after the country reached a debt-restructuring deal that imposes a hefty haircut on private creditors.

Moody’s now rates Greece at C, the lowest rung on its rating scale, down from its previous rating of Ca. The credit rater said it won’t assign an outlook on the new rating given the high likelihood the government will default on its bonds.

The “invitation” to  exchange old Greek debt “voluntarily” expires on Thursday night, March 8th ( Greek time ), and , as we have seen previously, I expect there to be a major roll of conflicting headlines leading up to the event.

In fact it has already begun:

Greece’s Prime Minister Lucas Papademos said Friday that based on the information he had so far, the participation of private sector creditors in the country’s debt swap and reduction proposal (PSI) “is significant.”

However, Papademos refrained from providing a specific percentage figure. Greece is aiming for a target of 90% participation, though it may decide to go ahead with the deal if participation is at least 75%.


The European Central Bank expects that the participation rate of Greece’s private creditors in the planned voluntary debt restructuring deal will be too low and collective-action clauses will have to be invoked, a person at the central bank told German weekly magazine Der Spiegel.

Greece has agreed on a debt restructuring with the private sector, which is a precondition for the second bailout package worth EUR130 billion. As part of the offer to private-sector investors that expires Thursday, these investors will have to take a 53.5% loss on their principal and will swap their old Greek bonds with new bonds that have longer maturities and lower coupons. Greece faces a EUR14.4 billion bond redemption on March 20 and needs to tie up external assistance because it doesn’t have enough funds to make the bond payments.

This is the so-called Private Sector Involvement or PSI.  Greece has other steps to take during the week, and ultimately the Troika will determine how to proceed with the bailout, but not until the results of the PSI are known.

It is still unknown exactly what level of private sector involvement is required to be acceptable to the EU/IMF troika, but given the leaked debt stability assessment claimed the required number was 95%, I doubt anyone will be satisfied with anything sub 90%. If that number is not reached voluntarily then the Greek officials have two choices. They can default or they can use collective action, which they hastily wrote into the majority of their privately held debt early last week. Collective action is the most likely course, but either of these paths will lead to a credit event and therefore CDS triggers and a whole new circus.

The other option is that Greece does get a very high participation rate and just pays any hold-outs in full. This scenario is unlikely in my opinion, but still a possibility. There would still be some technical issues to work through about official sector participation, but this would far better outcome for Greece. However, if this isn’t deemed a credit event, even though there was significant write-downs on issuance, then there may be flow-on effects to other sovereign’s yields.

You’ve got a week of this stuff ahead of you so get used to the headlines.

In other Eurozone news, as I suspected would occur,  just days after signing up for the new fiscal compact Spain has already decided it can’t meet it:

Spanish Prime Minister Mariano Rajoy said his government, which came to power at the end of 2011, will prepare a 2012 budget that aims to reduce its deficit to 5.8% of gross domestic product, far in excess of the 4.4% target his predecessor, José Luis Rodríguez Zapatero, had committed to. Mr. Rajoy said a rapidly deteriorating economic situation and a large 2011 budget overrun made the wide deviation necessary. Earlier this week, the government said Spain’s 2011 budget deficit stood at 8.51% of GDP, compared with a target of 6%.

Mr. Rajoy said he hadn’t announced Spain’s new budget target at a meeting in Brussels Thursday and Friday where EU leaders signed off on new fiscal rules. “This is a sovereign decision made by Spain, that I am announcing now, to you,”

And the response:

A Commission spokesman suggested Spain shouldn’t expect leniency. “Meeting fiscal consolidation targets in vulnerable countries has been and remains one of the cornerstones of EU’s comprehensive response to the crisis,” said spokesman Amadeu Altafaj Tardio. “It is key to reinforce confidence.”

So nothing has changed, and the crisis rolls on.

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