S&P Downgrades Greece on Higher Default Risks

June 13, 2011
'Significantly higher likelihood of one or more defaults'

Standard and Poor's slashed its credit rating for Greece on Monday by three notches to CCC, saying there was a significantly higher probability of a default in the struggling eurozone member.

"The downgrade reflects our view that there is a significantly higher likelihood of one or more defaults, as defined by our criteria relating to full and timely payment, linked to efforts by official creditors to close an emerging financing gap in Greece," said the rating agency.

It said its estimate of a 30% to 50% recovery upon default remains unchanged.

"In our view Greece is increasingly likely to restructure its debt in a manner that, under the conditions of any package of additional funding provided by Greece's official creditors, would result in one or more defaults under our criteria," said S&P's Mark Tierney.

Reacting to the downgrade, Greece accused the rating agency of shutting its eyes to reform efforts in Athens and EU talks on new debt aid.

"This decision overlooks actions by the government to preclude any problems in Greece's contractual obligations," the Greek finance ministry said, a reference to fears that Athens will be unable to repay its crushing debts.

The three-rate downgrade to CCC also ignores ongoing talks between European Union officials for a "sustainable solution" to finance Greece's payment needs, the ministry said.

New Aid Package to be Discussed

The latest blow came as European finance ministers prepared to meet on Tuesday to discuss a new aid package for Greece that could call on private holders of Greek debt to contribute by accepting delayed payment.

European Central Bank executives have argued against any moves that obliged private investors to take part in a Greek bailout, as ratings agencies likely would declare Greece in default, causing unknown dangers for the wider 17-member eurozone.

European Central Bank (ECB) president Jean-Claude Trichet reaffirmed Monday that any restructuring of Greece's debt would have to be voluntary to avoid serious consequences.

"We must avoid anything that would trigger a credit event, and anything that would trigger a default," he said to reporters on the sidelines of a speech at the London School of Economics.

However, ECB officials have indicated they could live with a rollover of Greek debt on a voluntary basis, which would involve banks and other investors agreeing to buy new bonds to replace ones set to mature in the next couple of years.

A Rock and a Hard Place

Standard and Poor's said it believes that Greece's recession "could well persist into 2012 and thus may further erode internal political support for the revised EU/IMF program."

The Greek government finds itself caught between the rock of necessary austerity reforms and the hard place of popular protest against them.

A general strike is planned for Wednesday as the government prepares to push through parliament a new austerity package worth more than 28 billion euros ($40 billion) by 2015.

The downgrades by S&P and other agencies have made it impossible for Greece to raise fresh loans on international markets as it struggles to fix its economy.

In a similar preemptive strike, the Moody's agency on June 1 had demoted Greek bonds to Caa1 just days before the end of an audit of Greek finances by the EU, the International Monetary Fund and the European Central Bank.

Copyright Agence France-Presse, 2011

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