- Greece has completed a distressed debt buyback.
- Following completion of the transaction, we are raising our long- and short-term sovereign credit ratings on Greece to ‘B-/B’ from ‘SD’ (selective default).
- The upgrade reflects our view of the strong determination of European Economic and Monetary Union (eurozone) member states to preserve Greek membership in the eurozone.
- The outlook on the long-term rating is stable, balancing our view of the government’s commitment to a fiscal and structural adjustment against the economic and political challenges of doing so.
On Dec. 18, 2012, Standard & Poor’s Ratings Services raised its long-term foreign and local currency sovereign credit ratings on the Hellenic Republic (Greece) to ‘B-‘ from ‘SD’ (selective default). We also raised our short-term foreign and local currency sovereign credit ratings on Greece to ‘B’ from ‘SD’. As a result, we have raised the ratings on all the outstanding issues, including those guaranteed by Greece, to ‘B-/B’. The outlook is stable.
The rating action reflects the completion on Dec. 17, 2012, of Greece’s distressed debt buyback (see “Greece Ratings Lowered To ‘SD’ (Selective Default),” published Dec. 5, 2012, on RatingsDirect on the Global Credit Portal), in tandem with approval by the Eurogroup (the finance ministers of EU member states belonging to the eurozone) of a loan disbursement to Greece under the second economic adjustment program. We view the eurozone member states’ decision to provide material cash flow relief to Greece as indicative of their determination to restore stability to Greek finances, and to preserve Greece’s eurozone membership.
Our criteria define the emergence from a sovereign default (short of resuming payment on the defaulted instrument) as the successful completion of an exchange offer or buyback. As the Greek buyback applied to only part of an issue–because some holders declined to participate in the transaction–we are raising the ratings on the original securities that remain outstanding. This reflects our opinion that Greece will likely continue to pay full debt service
as originally contracted.
Under our criteria, the ‘SD’ credit ratings of a sovereign government emerging from default are replaced by new ratings reflecting our revised view of that sovereign’s creditworthiness (see Appendix B in “Sovereign Government Rating Methodology and Assumptions,” June 30, 2011).
We estimate EUR6.8 billion in foreign-law-governed bonds held in the market was not tendered in the March 2012 Greek commercial debt restructuring. If Greece’s official debt were written-down – which could happen if Greece were to apply for a third European Stability Mechanism program in 2013 or 2014 – eurozone official creditors may seek comparability of treatment for holders of outstanding foreign-law-governed bonds.
Even after the buyback, Greece’s end-2012 net debt-to-GDP ratio of over 160% of GDP remains onerous. Nevertheless, subject to Greece meeting program conditions, eurozone member states have said they would significantly improve official lending terms to the government. The improved terms would include maturity extensions on bilateral and EFSF loans on top of a 10-year deferral of Greek interest payments to the EFSF: an effective write down of the Greek public debt stock in net present value terms, assuming nominal GDP growth starts gradually recovering from 2014.
The Economic Adjustment Program for Greece is scheduled to end in 2014, based on the assumption that Greece will be able to return to issuing medium- and long-term commercial debt by 2015. In our view, however, Greece’s access to long-term commercial funding remains subject to numerous domestic and external uncertainties.
The Eurogroup has today released EUR34.3 billion to Greece, EUR16 billion of which will be used to increase Greek banks’ regulatory capital. The Greek government is likely to keep meeting a portion of its financing needs by issuing Treasury bills, and we anticipate the freshly recapitalized domestic banks will be important buyers of these.
Greece’s fiscal consolidation is largely premised on tax hikes and improved tax collection, an extensive privatization program, and wholesale cuts in government spending (adopted in November 2012). We believe these adjustments carry implementation risks given the projected further output contraction in 2012 and 2013, which will likely see social pressures persist.
Badly needed net equity inflows into the real economy have not yet materialized in any material fashion. In this regard, the government has repeatedly failed to meet its privatization receipt targets–one reason behind this year’s increased financing needs. At the same time, we believe a better-capitalized banking system and indications of a gradual restoration in private sector competitiveness could improve prospects in 2013 for Greece’s more competitive sectors, particularly tourism.
The stable outlook balances our view of eurozone member states’ determination to support Greece’s eurozone membership and the Greek government’s commitment to a fiscal and structural adjustment against the economic and political challenges of doing so.
We could raise our long-term rating on Greece if the government follows through fully on its steps to comply with the EU/IMF program, thereby restoring predictability to its policymaking as well as contributing to a sustained economic recovery and improved prospects of sustainable debt-servicing.
We could lower the ratings if we believe that there is a likelihood of a distressed exchange on Greece’s remaining stock of commercial debt.