The downgrade follows a decision this month by Moody’s Investors Service to grade Greece only one level higher and may intensify pressure on European governments to stem the region’s sovereign-debt crisis. Credit-default swaps on Greece, Ireland and Portugal surged to records Monday on concern that governments’ struggles to resolve the turmoil will threaten their ability to pay off their debts.
“The ratings agencies are now playing catch-up with the market,” said Gianluca Salford, a fixed-income strategist at J.P. Morgan in London. “The market is pricing in a very high probability that there will be a credit event around Greece. The agencies are just catching up to the negativity that’s already priced in by the market, not the other way around.”
Swaps on Greece jumped 47 basis points to an all-time high of 1,610 in London after the S&P downgrade, according to CMA. Contracts on Ireland soared 27 basis points, to 740; Portugal climbed 22, to 764; and the Markit iTraxx SovX Western Europe index of swaps on 15 governments jumped 7 basis points, to 218, approaching the record of 221.75 set Jan. 10.
The yield difference, or spread, between 10-year German bunds and Greek securities of a similar maturity was at 1,402 basis points Monday, close to a record.
No other sovereign nation is graded as low as CCC by S&P, a spokesman said by e-mail. Moody’s cut its rating on Greece on June 1 to Caa1, leaving only Ecuador as a worse sovereign risk.
The downgrade comes as the European Central Bank and Germany battle over how to bail out Greece and whether officials should push creditors to share some of the costs. ECB President Jean-Claude Trichet said Monday that his advice to European governments is to “avoid what would be a compulsory concept” and “avoid whatever would trigger” a default.
S&P said that “our negative outlook indicates that a downgrade to ‘SD’ [Selective Default] could occur if Greece undertakes one or more debt restructurings or maturity extensions on terms that constitute distressed debt exchanges as defined by our criteria.” A restructuring would probably “result in one or more defaults under our criteria.”
The outlook on the rating is negative, S&P said. The rating company held its recovery rating at “4,” indicating it estimates bondholders would recover 30 percent to 50 percent of their investment.
A “financing gap has emerged in part because Greece’s access to market financing in 2012 and possibly beyond, as envisaged in the current official E.U./IMF program, is unlikely to materialize,” the report said.
— Bloomberg News