Greece Downgraded Again - Back In Default

Includes: GREK
by: Acting Man

The newly muzzled credit rating agencies are using whatever time remains to them to get out the downgrades of euro area sovereigns hard and fast. The latest country to catch yet another downgrade is Greece, which has been cut to "selective default" from "CCC" by S&P. Apparently S&P doesn't think the bond buyback is merely making use of a temporary market inefficiency. It indeed means something when bondholders can no longer count on receiving par at maturity.

Naturally, no one expects this downgrade to have any impact. It is only noteworthy because it underscores that the buyback is not just some innocuous operation.

According to Bloomberg:

Greece's credit grade was reduced to SD, or selective default, by Standard & Poor's from CCC after the government began buying its bonds back from investors, a statement on the rating company's website said yesterday.

The nation has offered 10 billion euros ($13.1 billion) to purchase debt issued earlier this year as the bailed-out country attempts to cut a debt load that may threaten future international aid. The rating was lifted to CCC from SD in May after undergoing the largest sovereign restructuring in history earlier this year.

'I don't think the downgrade will have a big impact,' said Hajime Nagata, who helps oversee the equivalent of $125.1 billion as an investor in Tokyo at Diam Co., a unit of Dai-ichi Life Insurance Co., Japan's second-biggest life insurer. 'They have already restructured.'

Greece began repurchasing bonds maturing from 2023 to 2042 this week, offering a higher-than-planned price to increase demand for the debt-reduction measure.

The buyback 'constitutes the launch of what we consider to be a distressed debt restructuring,' S&P said in its statement. 'Any potential upgrade to the CCC category rating would reflect, among other factors, our view of the debt relief that is being delivered through the buy back and its contribution to putting the sovereign's public finances on a sustainable footing.'

The SD designation 'includes the completion of a distressed exchange offer, whereby one or more financial obligation is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par,' according to S&P's website. (emphasis added)

S&P is quite correct in issuing this new rating. This, however, immediately raises the question: If the new EU rules on sovereign credit ratings (they may only be issued three times a year at fixed points in time) were already in force, would S&P then have to simply ignore this latest development and keep its mouth shut about a selective default occurring?

Are the eurocrats so blind as not to see how absurd their new rules are? If the credit rating agencies are to retain any shred of credibility, they will likely have to drop ratings of EU sovereign issuers altogether on the grounds that they can no longer guarantee to provide investors with a timely and correct picture.