Greece’s downgrade by Fitch Ratings is the first in a series of ratings cuts that the nation can expect after it negotiated the biggest sovereign debt restructuring in history.
Fitch lowered Greece’s credit grade by two levels to “C” from “CCC,” saying a default is “highly likely in the near term” and that it would cut the nation again to “Restricted Default” once a bond exchange is completed.
Standard & Poor’s (S&P) said in July it expected to downgrade Greece to “Selective Default” after the restructuring agreement, while Moody’s Investors Service has said it will cut the nation to its lowest rating.
Greece sealed a 130 billion euro (US$172.6 billion) bailout package by agreeing on Wednesday to austerity measures, while reducing its bond principal by 53.5 percent as investors swap into new securities with longer maturities and lower coupons.
Fitch and S&P have both said they expect to later raise Greece’s ratings once the deal has been completed.
“It’s almost a paradoxical exercise,” said Richard McGuire, a strategist at Rabobank International in London. “They downgrade you because you’re not paying your bonds and then upgrade you because the bonds don’t exist, so you’re not in default.”
Fallout from a downgrade to default won’t affect credit-default swaps insuring Greece’s debt, according to the rules of the International Swaps & Derivatives Association. A credit event that would trigger the swaps is decided by the association’s Determinations Committee, which meets at the request of its members, including traders and investors.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
Once the debt exchange is completed, Greece will be moved out of the “Restricted Default” category and “re-rated at a level consistent with the agency’s assessment of its post-default structure and credit profile,” New York-based Fitch said in a statement yesterday.
In emerging markets, the process has typically taken “a couple of months,” though Jamaica spent one day rated “Restricted Default” in 2010, according to London-based Paul Rawkins, Fitch’s primary analyst on Greece.
“With Greece, the onus will be on completing the process as quickly as possible,” he said.
S&P rates Greece at “CC,” two steps up from a default rating. Moody’s said in December it would cut the country’s “Ca” grade by one level to “C” if the debt exchange means its net-present-value loss on its bonds is greater than 65 percent.
Greek Finance Minister Evangelos Venizelos repeated yesterday that a formal invitation for the bond exchange would be made by today.
Real losses from the swap may be more than 70 percent, said Andreas Koutras, an analyst at ITC Markets in London.