S&P downgrades Portugal, Greece

By Dow Jones Newswires
Posted March 29 at 10:52 a.m.

Rating agency Standard & Poor’s delivered a damning verdict of the euro zone’s new plans for resolving sovereign debt crises, downgrading two of the euro zone’s most troubled member states on Tuesday.

Citing fears that the two may have to restructure their debt and force losses on bond holders after 2013, S&P pushed its rating of Greek sovereign debt down further into junk territory, cutting it by two notches to BB- from BB+. It also cut Portugal’s senior debt rating by one notch to BBB- from BBB.

S&P had only last week downgraded Portugal by two notches, and the country is on the verge of losing its investment-grade status for the first time.

The outlook for both countries’ ratings remains negative, S&P said.

S&P said it is “highly likely” that Greece will have to access official assistance after the middle of 2013, when the European Financial Stabilization Facility is to be replaced permanently by the European Stabilization Mechanism.

The key difference between the two is that the ESM foresees asking bondholders to accept losses before extending taxpayer-funded help. S&P noted that this structure is “detrimental” to private creditors of both countries.

Greece has already accepted a three-year plan of emergency help from the EU and International Monetary Fund, while S&P expects Portugal to ask the EFSF and IMF for a similar package soon.

Greek Prime Minister George Papandreou blamed the EU for the latest in a series of steps that have left without an investment-grade rating from any single agency.

“S&P is downgrading Greece not because of what Greece is doing,” Papandreou said. “What they are saying is that the decisions of the European Union are not enough, or they are in the wrong direction.”

Under the EU’s text, all debt issued by euro-zone states after the middle of 2013 will be clearly subordinate to the claims of the ESM. However, many market analysts think that already-outstanding debt will also have to be restructured to bring the two countries back to a sustainable debt position. S&P sees Greece’s sovereign debt peaking at over 160% of gross domestic product in 2013.

“The pre-conditions of the ESM, against the background of Greece’s hefty government debt and high borrowing needs, undermine Greece’s plans to resume commercial borrowing by mid-2013, when the EU/IMF program of official financial support terminates, and increase the likelihood of debt restructuring,” S&P said in a press release.

S&P is the first rating agency to react to the official ratification by EU leaders of the ESM’s establishment from 2013 onwards. The move had been widely anticipated, especially in the absence of any new euro-zone initiatives to make the two countries’ debt loads more sustainable.

As a result, the euro was little changed against the dollar after the news at $1.4073, and only fractionally weaker against the Swiss franc at CHF1.2951.

The countries’ respective debt markets had already been on a downward path Tuesday and lost more ground after the announcement. At 1410 GMT, the yield on the benchmark two-year Portuguese note was up 23 basis points from Monday’s close at 7.45%, while its Greek counterpart was 14.86%, up 10 basis points from Monday.

The cost of insuring the two countries’ debt also rose after the downgrades, Portugal being the most affected.

The five-year credit default swap on Portugal widened to 555 basis points from 540 basis points earlier, while the Greek CDS spread moved out to 970 basis points from 965 basis points earlier, according to data-provider Markit.

A rise of one basis point in the cost of five-year CDS equates to a $1,000 rise in the annual cost of protecting $10 million of debt for five years.

An ECB spokesman declined to comment, but the bank has been sharply critical in the past of ratings agencies’ “pro-cyclical” behavior, which it says merely exaggerates the prevailing market sentiment.

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One comment:

  1. citybiker March 29 at 12:29 pm

    Have they been downgraded to “ILLINOIS”