Greece falls to S&P's lowest rated, default warned

Wednesday, 15 June 2011 00:00 - - {{hitsCtrl.values.hits}}

(Reuters) - Greece became the lowest-rated country in the world according to Standard & Poor's, which downgraded it on Monday and warned that any attempt to restructure the country's debt would be considered a default.

Greece now has a lower credit rating than countries such as Pakistan and Ecuador, which has been shut out of international markets since a 2009 default. The cost of insuring Greek debt is now almost twice as much as the price of insuring Pakistani bonds.

S&P's move was the latest blow for Greece's Socialist government, which is scrambling to push an unpopular austerity package through parliament to ensure continued funding under a year-old bailout plan.

Barely a year after Athens was granted a first 110-billion-euro aid package, the European Union, the IMF and the European Central Bank are working on a second funding deal.

Some European countries such as Germany oppose giving more money to Greece without the assistance of private creditors.

S&P said European policymakers looked increasingly likely to impose a restructuring of Greece's debt -- either via a bond swap or by extending bond maturities -- as a means of making the private holders of Greek bonds share the burden.

"In our view, any such transactions would likely be on terms less favorable than the debt being refinanced, which we, in turn, would view as a de facto default according to Standard & Poor's published criteria," the agency said.

In such a case, S&P said, Greece's credit rating would be lowered to "selective default," or SD, while the ratings on the country's debt instruments would be cut to D.

It cut Greece's long-term sovereign credit rating to CCC, four steps away from default, from B. The short-term rating was affirmed at C and all ratings were removed from credit watch.

The move takes S&P's rating of Greece one notch below Moody's Caa1, while Fitch ranks Greece at B-plus. This makes Greece the lowest country in S&P's rankings.

S&P said the outlook on the long-term rating remained negative, a sign that another downgrade is likely in the next 12 to 18 months.

S&P said it will probably downgrade the ratings of four Greek banks as well -- National Bank of Greece, EFG Eurobank Ergasias, Alpha Bank, and Piraeus Bank. All of them are currently rated B.

GREECE'S WILL TO STAY IN EURO

Greece said the move by Standard & Poor's overlooked its commitment to carry on with tough fiscal efforts to repair public finances and remain a member of the 17-member euro currency club.

"The decision also overlooks the government's moves to avoid any problems relating to Greece's contractual obligations, as well as the will of all Greeks to plan our future inside the euro zone," the Finance Ministry said in a statement.