Greece on brink of default after downgrade*
Published: 14 June 2011 | Updated: 15 June 2011
Greece has become the lowest-rated country in the world, according to Standard & Poor's, which downgraded the country yesterday (13 June) and warned that any attempt to restructure its debt would be considered a default. The burning issue will be discussed at an emergency meeting of EU finance ministers on 14 June.
In the beginning of 2010, it was discovered that Greece had been working with Goldman Sachs and other banks to hide the amount of money it had been borrowing since 2001.
The Greek government’s total debt was more than €215 billion, while its annual budget deficit was 13.6%.
On 2 May 2010, a loan agreement was reached between Greece, the other eurozone countries, and the International Monetary Fund (IMF). Since then, a total of €110 billion of loans have been made available to Greece.
But barely a year later, the EU, the IMF and the European Central Bank are working on a second funding deal. Some European countries such as Germany oppose giving more money to Greece without the assistance of private creditors.
Greece, which has been shut out of international markets since a 2009 default, now has a lower credit rating than countries such as Pakistan and Ecuador. The cost of insuring Greek debt is now almost twice as high as the price of insuring Pakistani bonds.
It cut Greece's long-term sovereign credit rating to CCC, four steps away from default, from B. The short-term rating was affirmed at C and all ratings were removed from credit watch.
The move takes S&P's rating of Greece one notch below Moody's Caa1, while Fitch ranks Greece at B-plus. This makes Greece the lowest country in S&P's rankings.
S&P's move was the latest blow to Greece's socialist government, which is scrambling to push an unpopular austerity package through parliament to ensure continued funding under a year-old bailout plan.
Restructuring draws near
S&P said European policymakers looked increasingly likely to impose a restructuring of Greece's debt - either via a bond swap or by extending bond maturities - as a means of making private holders of Greek bonds share the burden (see 'Background').
"In our view, any such transactions would likely be on terms less favourable than the debt being refinanced, which we, in turn, would view as a de facto default according to Standard & Poor's published criteria," the agency said.
Berlin is pushing hard for commercial banks to contribute to the cost of any new Greek bailout package, but is struggling to convince the European Central Bank and ratings agencies that this can be done without triggering a credit default.
In such a case, S&P said, Greece's credit rating would be lowered to "selective default," or SD, while the ratings on the country's debt instruments would be cut to D.
EU finance ministers will hold an emergency meeting on Monday (14 June) to assess the situation.
Dutch Finance Minister Jan Kees de Jaeger said on Monday that the private sector must offer a "substantial" contribution to any new financing for Greece, throwing further weight behind Germany's calls for a rollover of Athens' debt.
S&P said the outlook on the long-term rating remained negative, a sign that another downgrade is likely in the next 12 to 18 months.
S&P said it will probably downgrade the ratings of four Greek banks as well - the National Bank of Greece, EFG Eurobank Ergasias, Alpha Bank and Piraeus Bank. All of them are currently rated B.
Greek says will to stay in euro
Greece said the move by Standard & Poor's overlooked its commitment to carry on with tough fiscal efforts to repair public finances and remain a member of the 17-member euro currency club.
"The decision also overlooks the government's moves to avoid any problems relating to Greece's contractual obligations, as well as the will of all Greeks to plan our future inside the euro zone," the Finance Ministry said in a statement.
Several international banks have come out publicly in favour of rolling over their holdings of Greek debt, including France's Crédit Agricole, which owns Greek bank Emporiki.
Germany's banking association said on Saturday it backed the idea of private creditors participating in the rescue.
The banks' participation would be part of a second bailout for Greece worth around €120 billion aimed at giving Athens more time to tackle its €340-billion debt load, under the assumption that it will not be able to borrow on international markets this year or next.
Concerns that a second rescue may trigger a credit event drove the cost of insuring Greek government debt against default to a record high of 1,600 basis points on Monday.
Five-year credit default swaps (CDS) on Greek government debt rose 58 bps on the day to 1,600 bps, according to data monitor Markit, meaning it cost 1.6 million euros to protect 10 million euros of exposure to Greek bonds.
By comparison, Pakistan's five-year CDS were trading around 880 bps.
The euro pared gains against the dollar and the US stock market briefly turned negative after the downgrade. Brent crude oil also fell after the move increased investors' nervousness over the economy and oil demand.
There are differences between the leaders of European Union states and the European Central Bank, which remains opposed to private sector involvement in any Greek debt restructuring, saying it may set off a chain reaction in financial markets that would undermine the credit-worthiness of other stressed euro zone sovereigns.
EU leaders will discuss a new deal at a 23-24 June summit.
Ben May, an economist at London-based Capital Economics, said he did not see the S&P downgrade as having a material impact on the timing of a new funding package.
"We believe some form of a second bailout package will be in place to avoid a disorderly default," he said.
After failing to meet fiscal targets under the first bailout deal the government, which is trailing the conservative opposition in opinion polls, has decided to raise taxes and slash spending more than planned this year to avoid default.
The prospect of more austerity and rising unemployment has fueled 20 days of protests in central Athens with a big general strike planned for Wednesday, challenging the government as its new package is headed for parliament for a vote.
EurActiv with Reuters
Dutch Finance Minister Jan Kees de Jager said on Monday the private sector must offer a "substantial" contribution to any new financing for Greece, throwing further weight behind Germany's calls for a rollover of Greece's debt.
"For me it is inseparable that I will only consider an additional aid programme for Greece provided [...] the private sector makes a substantial contribution," De Jager wrote in a letter to the Dutch parliament on Monday.
He added this could take the form of an extension of the maturity of Greek debt by private sector investors who already have exposure to it. Other conditions included Greece making "rigorous" progress on structural reforms to cut its budget deficit, International Monetary Fund involvement and privatisation of state assets.
"I will do everything possible together with like-minded member states to ensure that strict conditions are imposed on a possible additional aid programme," De Jager wrote.
"The Netherlands considers enforcement of the conditions to be important and will otherwise not agree to an additional [aid] programme."
The Permanent Representation of Greece to the EU today (14 June) issued the following statement:
"Standard & Poor's decision to cut the credit rating of Greece today makes reference to rumours and statements by representatives of the European Commission and European Central Bank. However, the decision ignores the intense consultations taking place currently between the same institutions and the IMF aimed at designing a viable solution that will cover the financing needs of Greece in the coming years.
"The decision by Standard and Poor's also neglects the determined efforts of the Greek government to avoid at any costs any possible violation of Greece's contractual obligations, and the strong desire of the Greek people to plan for their future within the euro zone.
"The Greek government has shown its willingness and capacity in the recent past to meet important fiscal targets and last week submitted to parliament a Medium-Term Fiscal Strategy to be passed by the end of June that outlines detailed, specific fiscal commitments that will ensure the sustainability of Greek sovereign debt.
"In any case, the government remains determined to implement the difficult policies required for Greece to exit the crisis," the message from the Greek authorities ends.
The United States should "actively and forcefully" oppose any IMF bailout loans to rescue debt-heavy Greece, two Republican senators urged President Barack Obama on Monday, AFP reported.
In a letter to Obama, Senators John Cornyn and David Vitter said such aid would violate a provision of US law that calls for opposing International Monetary Fund (IMF) loans to countries unlikely to repay them.
"These provisions became federal law for a reason. We sought to prevent US taxpayers' money from again being used by the IMF to bail out foreign nations that have made irresponsible spending decisions," said the senators.
Greece's debt as a percentage of GDP was 127% in 2009 and 142% in 2010, according to the IMF, and credit default monitor CMA DataVision said that the costs of ensuring against default on Greece's government debt "skyrocketed to record highs this week," the lawmakers said.
"As a result, we believe that it is highly unlikely that Greece will ever be able to repay any loans provided to it by the IMF," the senators said.