Greece One Step Closer to Default

Posted: February 28, 2012 in Economics, Eurozone Default

“If enough bondholders do not accept the bond swap offer, Greece would be deemed to be in outright payment default”

~ Standard & Poor’s Rating Agency

Anyone out there shocked to find that no Greek bailout has taken place yet?  Anyone flabbergasted that zero dollars have flowed into Greek coffers?  Well, if you are, you haven’t done your homework.  After all, several sources, including our friends at ZeroHedge and The Slog, as well as this very site, have stated in recent weeks that no “deal” is done until money flows from the ECB to Greece.  Thus far, nothing of the sort has taken place.  And while several people were laughing at us last week when the European leadership notified the world that a deal had been agreed to, and yesterday when the Bundestag agreed to send German tax dollars to Greece, this morning we wake up to read that Greece is on the verge of default as noted by the Standard & Poor’s rating agency, one of the three organizations who are paid by the issuers of bonds to rate a debtor’s creditworthiness.  In other words, people paid by Greece to rate Greece’s credit say they are incredibly close to defaulting on their debt.  Enjoy this statement, as reported by Tyler at ZeroHedge this morning:

Greece Ratings Lowered To ‘SD’ (Selective Default)

Rating Action

On Feb. 27, 2012, Standard & Poor’s Ratings Services lowered its ‘CC’  long-term and ‘C’ short-term sovereign credit ratings on the Hellenic Republic  (Greece) to ‘SD’ (selective default).

Our recovery rating of ‘4’ on Greece’s foreign-currency issue ratings is  unchanged. Our country transfer and convertibility (T&C) assessment for  Greece, as for all other eurozone members, remains ‘AAA’.

Rationale

We lowered our sovereign credit ratings on Greece to ‘SD’ following the Greek government’s retroactive insertion of collective action clauses (CACs) in the documentation of certain series of its sovereign debt on Feb. 23, 2012. The effect of a CAC is to bind all bondholders of a particular series to amended bond payment terms in the event that a predefined quorum of creditors has agreed to do so. 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. Under our criteria, either condition is grounds for us to lower our sovereign credit rating on Greece to ‘SD’ and our ratings on the affected debt issues to ‘D’.

What does all this jargon mean?  Simple.  Because Greece has retroactively and unilaterally created new conditions for when and how they will pay back their creditors to their own advantage, making it easier for Greece to force a larger “haircut” onto its lenders, (ZeroHedge and others have done a good job of covering this, and perhaps we can revisit this topic in another post) S&P is stating that it is within its right by its own definition to find Greece is in a state of default.  After all, what is a default but a failure to repay a loan based on the original conditions of said loan?  In essence, S&P is stating that Greece is already in default.  The term “selective” seems to be applied here to indicate that the default is of Greece’s own making, which may be used as a way to avoid triggering Credit Default Swaps.  This is absolutely another conversation for another time.

Let it suffice to say today that we are in uncharted territory here.  The Slog has treated this topic today with the article “When Will Enough Be Enough for the Credit Agencies?” and ZeroHedge has their article here.  As it turns out, March 23 is closer now than it was last time we covered Greece, no money has made its way to the Bailout Fund, and with news like this being circulated in the U.S., what are the odds that Europeans (read Germans) are going to want to chase a nation already in technical default with their own taxes?

He who laughs last laughs best, but will any of us be laughing when Greece goes under?  Three more weeks until we find out…

~ DS

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