Standard and Poor's downgraded its rating on Greek sovereign debt to 'selective default' on Monday after the country struck a debt swap deal with its private bondholders last week with an aim to reduce its debts.
S&P said that it has lowered its CC long-term and C short-term sovereign credit ratings on Greece to 'SD' or 'selective default.'
The rating agency said the Greek government's retroactive insertion of collective action clauses (CACs) in the documentation of certain series of its sovereign debt on February 23 constituted a "distressed debt restructuring."
The insertion of a CAC binds 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. According to S&P, this action materially changes the original terms of the affected debt and constitutes the launch of 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'," S&P said.
Though CACs generally do not change the government's incentive to pay its obligations in full and on time, the retroactive insertion of CACs will diminish bondholders' bargaining power in an upcoming debt exchange, it said. Greece launched such an exchange offer on February 24.
The report noted that if a sufficient number of bondholders do not accept the exchange offer, Greece would face an imminent outright payment default. This is because of its lack of access to market funding and the likely unavailability of additional official financing, which are predicated on a
successful exchange offer.
Under the debt swap deal, banks and other private creditors will have to write down 53.3 percent of the nominal value of their Greek bond holdings. This is estimated to reduce the country's debt burden by 107 billion euros.
Last week, Fitch Ratings cut Greece debt to 'C' from 'CCC' and said a default is highly likely in the near term. It also cited the imposition of retrospective CACs as a reason for the downgrade.
The G20 meeting on Sunday demanded Europe to strengthen its bailout fund before leading economies provide extra support to raise the resources of the International Monetary Fund. The move has added pressure on Germany, which has already contributed the most to bailouts.
German Parliament on Monday gave overwhelming support to Greece's second bailout package with 496 members voting in favor of the 130 billion-euro aid approved by its international creditors last week.
Eurogroup President Jean-Claude Juncker has called a meeting of Eurozone finance ministers on Thursday to discuss progress with Greece's second bailout package.
by RTT Staff Writer
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