S&P downgrades Greece to selective default

Not surprisingly, Standard & Poor’s (S&P) downgraded Greece’s long-term credit rating from CC to SD (selective default). This practically means that, according to the credit rating agency, the country has begun to repay selectively only part of its debt. The reason for the downgrade was the decision of the Greek Government to insert retroactively collective-action clauses to its sovereign debt, effectively forcing all bondholders to accept a bond-swap offering.

“The downgraded credit rating will not have any impact on the Greek banking system,” the Greek Ministry of Finance responded immediately to the move. According to the Ministry, S&P’s move was expected and all consequences thereof have been predicted, planned and accounted for, in accordance with the decisions of the European Council and the Eurogroup. The lowered rating will not hurt the banking system in our southern neighbour since any likely effect on liquidity has already been dealt with by the Bank of Greece and the European Financial Stability Fund is expected to do the same, the Finance Ministry said in a statement.

According to S&P, the retroactive insertion of collective action clauses will diminish bondholders’ bargaining power in an upcoming bond swap for a writedown of 53.5% on the nominal value of the privately held Greek debt. In real terms, this will be a nearly 75% loss, argues the rating agency.

“Greece is running out of alternatives to quitting the Eurozone as austerity measures imposed on the nation hamper its economic recovery,” Nobel-prize winning economist Paul Krugman commented, quoted by Bloomberg. According to him, in the next two years, we will witness a recession in Europe, a new, uncovered default on the part of Greece and the possible eviction of the country from the Eurozone.

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