S&P warns Greece of downgrade

Ratings agency Standard and Poor’s (S&P) put Greece on watch for a possible downgrade on concerns the country will be included in a European Union support mechanism that may force private bond holders to accept a discount on their investments. S&P said that it placed Greece’s BB+ long-term sovereign rating on credit watch with negative implications since Greece may be included in the European Stability Mechanism (ESM) in addition to the 110-billion-euro in aid from the EU and International Monetary Fund. If Greece is included in the ESM after the EU-IMF package expires in 2013, then private bond holders may have to be forced to take a haircut if the country is declared insolvent by EU nations, according to the agency. S&P’s comments follow a decision by Eurogroup finance ministers last month that sovereign bonds issued as of 2013 would carry collective action clauses – an instrument allowing a country to restructure its debt with the agreement of a certain percentage of creditors. The mechanism would also allow the ESM’s shareholders to trigger debt restructurings on a case-by-case basis. «We believe that the multilateral political prerogative to trigger private debt restructuring could be subject to political rather than objective financial considerations,» it said in a statement. The agency plans to make a final decision on the possible downgrade in three months after analyzing the ESM’s final details, it added. Investment bank Nomura International said S&P’s move may force policymakers to alter the terms of the ESM. «S&P’s warning about a potential downgrade of Greece’s debt could cause a rethink of the current crisis-resolution structures,» a team of London-based analysts wrote in a note, Bloomberg reported. Greece’s Finance Ministry was «surprised» by S&P’s decision, saying that it ignores steps taken by the Greek government to implement fiscal reform. «The decision rests exclusively on developments abroad,» the ministry said. «In any case, S&P’s approach relates only to countries that cannot access markets after 2013 and this does not apply to Greece, which is already receiving assistance to solve its debt problems with very good results so far.» Brokers played down the immediate impact of the S&P announcement, saying that current ratings are a non-item as Greece is not issuing bonds and does not expect to do so until 2011-12. In a daily note, EFG Eurobank Securities said that given all the fiscal consolidation effort so far, it had expected rating agencies to be more satisfied. In Athens, stocks advanced 0.84 percent yesterday while the Greek 10-year yield declined 18 basis points to 11.67 percent.

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