Downgraded to the edge of default

Rating agency Fitch downgraded Greece again on Wednesday, this time by two notches, bringing the country just a step away from the restricted default (RD) category.

Fitch reduced the Greek credit rating from CCC to C following the Eurogroup?s approval for the bond swap on Tuesday morning and the tabling in Parliament of the bill introducing collective action clauses (CACs) in Greek bonds.

Rating agencies had already warned Athens that for as long as the bond swap process goes on, Greece?s status will be technically labeled restricted default. Once the process is completed, the agencies said they would reassess their rating. That is expected to happen on Friday, when the government is due to make the official offer for private sector involvement (PSI) in the swap.

Fitch suggested on Wednesday that if the PSI plan is completed it would constitute a default, resulting in a downgrade to RD status. The rating of the Greek bonds affected by the swap, including those restructured in the context of the CACs, would be downgraded to D status (default).

Fitch argued that the retrospective imposition of CACs constitutes an unfavorable shift to the terms and conditions of Greek bonds and estimates that the PSI will be ?distressed and coercive.? It did make it clear, however, that the main credit event was the bond swap itself, that it would rate Greece and its bonds accordingly, and that once the PSI is completed it would revise its rating of Greece.

On Thursday the Greek Parliament is expected to ratify the regulation regarding the CACs. Finance Minister Evangelos Venizelos noted yesterday that the bonds that are already under British or Japanese law (amounting to about 18 billion euros), and already include CACs, will be swapped in early April.

The European Financial Stability Facility will provide Greece with 35 billion euros for one month so that Athens has the liquidity that will protect it from the RD condition, thereby securing the cash flow local banks need from the European Central Bank. In another account there will be an additional 23 billion euros to cover the capital needs banks may have during the bond swap process.