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It came as no surprise, but Fitch Ratings knocked Greece’s credit rating a few notches lower Wednesday to C, from CCC, The ratings agency said the planned 53.5% haircut on the face value of the country’s bonds will “constitute a rating default” if completed.
Wednesday’s action from Fitch comes a day after Greece secured a second package of bailout loans from the so-called Troika – the IMF, European Commission and ECB – worth €130 billion. The agreement with private sector bondholders on 53.5% haircuts is crucial to reduce Greek’s debt burden to a level that is manageable, at least in the short term, but still awaits creditor approval over the next few weeks.
The deal is not enough to save Greece from a default though, Fitch said Wednesday:
the proposal to reduce Greece's public debt burden via a debt exchange with private creditors will, if completed, constitute a rating default, and result in the country's IDR being lowered to 'Restricted Default' ('RD') upon completion. The ratings of GGBs affected by the exchange, including those not tendered but restructured under CACs, which are expected to be imposed retrospectively on bonds issued under Greek law, will also be lowered to 'D' ('default') at this time.
via FitchResearch.
Perhaps more importantly, Fitch appears to signal that in its opinion the debt swap should trigger credit default swaps on Greek debt.
Fitch regards the imposition of retrospective [collective action clauses] as a material adverse change in the terms and conditions of GGBs in the context of an imminent debt exchange and confirms its assessment that the exchange will be distressed and de facto coercive on private holders of Greek bonds. Nonetheless, the primary credit event is the exchange itself and Fitch will rate Greece and its securities accordingly.
While the size of Greece’s bond market, and subsequently the amount of insurance written on its debt, is miniscule compared to those of fellow debt-ridden countries like Italy or Spain, a default scenario that does not trigger CDS could set a dangerous precedent if the sovereign debt crisis flares up again elsewhere in the eurozone. (See “Why ‘Voluntary’ Haircuts On Greek Bonds Will Haunt Europe.”)
The biggest concern – a run on the European banking system and the threat it would pose to the global financial system – has been largely removed by the ECB thanks to its long-term refinancing operations. The first shelled out €489 billion in ultra-cheap three-year loans to banks in December, and the second is due Feb. 29.
While the loans do not solve the underlying risk of a sovereign default, it does take the liquidity off the table for major banks at a time when banking authorities have said European banks -- including Deutsche Bank, BNP Paribas, Banco Santander and Société Générale – need to fill considerable capital holes. (The latest move to that end came Wednesday, as BNP sold an energy lending business to Wells Fargo for an undisclosed amount.)
National Bank of Greece, a stock that rallied in the run-up to Tuesday's bailout, was in rocky shape again Wednesday morning, with American depositary receipts down 9.6% pre-market.