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S&P Downgrades Greece to ‘Selective Default’

February 28, 2012


Greece’s credit ratings were cut to “Selective Default” by Standard & Poor’s after it negotiated the biggest sovereign debt restructuring in history.

S&P dropped Greece’s rating from CC, two levels above default, after the government added clauses to its debt designed to mop up investors unwilling to take part in the exchange, the New York-based company said in a statement Monday.

The downgrade follows a reduction last week by Fitch Ratings to C, while Moody’s Investors Service has said it will cut the nation to its lowest rating. Greece published the formal offer document last week for its agreement to exchange bonds for new securities, with investors taking a haircut of 53.5 percent. The restructuring uses so-called collective action clauses to discourage holdouts, the use of which would trigger credit- default swap insurance contracts on the nation’s debt, according to the rules of the International Swaps & Derivatives Association.

“Everyone knew there was going to be some kind of swap,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York. “I suspect that it will be pretty much shrugged off and it’s in the market.”

Debt Restructuring

Greece negotiated the biggest debt restructuring in history as it seeks to reduce national debt to 120 percent of gross domestic product by 2020, from 160 percent last year, and to meet the terms of a 130 billion-euro ($170 billion) international bailout. An agreed debt swap, known as private- sector involvement, or PSI, will slice 100 billion euros off more than 200 billion euros of privately held debt if all investors participate.

S&P’s decision to downgrade Greece and the list of PSI eligible securities to D, was “pre-announced and all its consequences have been anticipated, planned for and addressed” by the European Council and the Eurogroup, the Greek Finance Ministry said in an e-mailed statement Monday.

The downgrade has “no impact in the Greek banking sector as its liquidity effect has been address by the Bank of Greece and consequently by the EFSF,” the Ministry said in the statement.

The Greek sovereign rating is expected to be upgraded from SD once the private sector swap on Greek sovereign debt is completed, the Ministry said.

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