25th Mar 2023

Eurozone 'expected' Greek downgrade

  • Eurogroup chief Jean-Claude Juncker (r) says the downgrade was 'duly anticipated' (Photo: Council of European Union)

Standard & Poor's on Monday (27 February) downgraded Greece to "selective default" due to a bond swap operation aimed at slashing some €100 billion off national debt.

Under the operation, which will take place between 8 and 11 March, banks and private investors will voluntarily trade their old Greek bonds for new ones, taking a net loss of up to 70 percent, depending on the maturity of the bond. So-called sweeteners to the tune of €30 billion will accompany the deal to make the swap less painful.

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"If the exchange is consummated (which we understand is scheduled to occur on or about March 12, 2012), 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," the US-based ratings agency said in a statement.

A triple-C rating is still considered "junk" territory, reflecting Greece's "uncertain economic growth prospects and still large government debt, even after the debt restructuring is concluded."

The agency also warned that if there are not sufficient bondholders taking up the swap offer, "we believe that Greece would face an imminent outright payment default. This is because of its lack of access to market funding and the likely unavailability of additional official financing."

It added that if Greece were to exit the eurozone and re-introduce the drachma currecny, its national bank would no longer be part of the European system of central banks and its long-term perspective would be even worse.

Eurozone chief Jean-Claude Juncker said in an emailed statement to press the latest downgrade was "duly anticipated and taken into account" when planning the bond swap in the first place.

"I look forward to a high participation of private creditors in the private sector involvement [PSI] operation and take note of S&P’s intention to upgrade the lower ratings following the settlement of the bond exchange," he added.

The Greek ministry of finance also said the downgrade was "expected" during the PSI operation. "The downgrade has no impact in the Greek banking sector as its liquidity effect has been addressed by the Bank of Greece," it said in an emailed statement.

Last week, the Greek parliament passed the so-called collective action clauses law, which establishes the legal basis for the bond swap to take place. At least two thirds of the new bonds on offer will have to be taken up by private investors for the operation to be deemed successful.

Not all banks welcome the deal.

Germany's Commerzbank last week questioned the 'voluntary' nature of the operation. "The participation in the haircut is as voluntary as a confession during the Spanish Inquisition," Commerzbank CEO Martin Blessing said.

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