Ratings firm Standard & Poor’s (S&P) on Monday declared Greece in “selective default” after banks agreed to write off more than half of their Greek debt holdings in a second EU bailout of the country.
The rating was lowered from S&P’s already junk-level “CC” grade for Greece, which has been seeking to avoid an outright default on its massive debt by negotiating a “voluntary” debt exchange with creditors.
However, S&P said the terms Greece put in the tentative deal agreed on Feb. 21, which amounts to a 53.5 percent writedown, forced the downgrade.
It cited Greece’s move following the Feb. 21 debt deal to amend its sovereign bond documentation with collective action clauses (CAC).
A CAC binds all bondholders of a certain series to amended payment terms in the event that a certain quorum of creditors has agreed to the terms, S&P said.
“In our opinion, Greece’s retroactive insertion of CACs materially changes the original terms of the affected debt and constitutes the launch of what we consider to be a distressed debt restructuring,” it said.
In the 237 billion euro (US$320 billion) bailout deal, the EU agreed to provide Greece with 130 billion euros in new financing, while representatives of private investors, mostly banks, agreed to write off 107 billion euros worth of Greek debt via a bond swap.
The government hopes that nearly all of its private creditors will sign up to the bond swap deal, allowing Athens to impose the collective action clause to force hold-outs to accept the swap and losses as well.
The bond swap was launched on Friday, and is scheduled to be completed by about March 12.
S&P said that if the exchange was consummated, “we will likely consider the selective default to be cured and raise the sovereign credit rating on Greece to the ‘CCC’ category, reflecting our forward-looking assessment of Greece’s creditworthiness.”
Earlier on Monday, Moody’s Investors Service warned that despite the Feb. 21 deal, “the risk of a default even after this distressed exchange [of bonds] is completed remains high.”
“Greece’s debt burden will remain large for many years, and the country is unlikely to be able to access the private market after the second assistance package runs out,” Moody’s senior analyst Sarah Carlson said.
“The outcome of elections, expected in April, also constitutes a source of political and implementation risk,” she added.