S&P loses faith in Greece, rating cut clouds debate

The wave of bad news continues for Greece struggling to wriggle itself out of the debt mess it finds itself in. With the latest credit downgrade from Standard & Poor’s (S&P), the going has got even a lot tougher. The warning that any attempt to restructure the country’s debt would be considered a default complicates the scene further.

[caption id=“attachment_25148” align=“alignleft” width=“380” caption=“The cost of insuring Greek debt is now almost twice as much as the price of insuring Pakistani bonds. Pascal Rossignol/Reuters”]  [/caption]

Greece now faces the ignominy of having a lower credit rating than countries like Pakistan and Ecuador, for which international markets are off-linits since a 2009 default. The cost of insuring Greek debt is now almost twice as much as the price of insuring Pakistani bonds.

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S&P’s move came as 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. Barely a year after Athens was granted a first 110-billion-euro ($158-billion) aid package, the European Union, 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.

S&P said European policymakers are very close to imposing a restructuring of Greece’s debt – either via a bond swap or by extending bond maturities – as a means of making the private holders of Greek bonds share the burden. “In our view, any such transactions would likely be on terms less favorable 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.

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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 said the outlook on the long-term rating remained negative, a sign that another downgrade is likely in the next 12 to 18 months.

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.

The euro on Monday, however, sprang a surprise as investors shrugged off Standard & Poor’s decision to cut Greece’s sovereign rating to the lowest in the world, choosing instead to focus on the likelihood that euro-zone officials will reach a deal to help the nation avoid a default. “Europe will come through in the end and do the things which do not upset markets too much,” said Alan Ruskin, global head of G10 foreign exchange strategy at Deutsche Bank in New York.

The common currency has been buffeted in recent weeks by continued back-and-forth over a new lifeline for fiscally stressed Greece. But the euro’s gain Monday suggests investors might be buying into the idea that the ink will soon dry on a final agreement that would help Greece avoid default, analysts said. “One suspects that policymakers will avoid such a dire outcome, but the uncertainty is weighing on investment decisions,” said Karl Schamotta, market strategist at Western Union Business Solutions in Victoria, BC.