- Associated Press - Wednesday, July 27, 2011

ATHENS, Greece— Standard and Poor’s on Wednesday relegated Greek government bonds to the deeper end of junk status, cutting the debt-crippled country’s credit rating by 2 notches to CC, with a negative outlook.

The international ratings agency said a proposed restructuring of Greece‘s heavy debt load under a second international bailout deal worth €109 billion ($157 billion) would amount to a selective default. Both of the other major ratings agencies have said much the same.

A Standard and Poor’s statement also said the possibility of a future Greek default is likely to remain high.

Under the debt relief deal struck in Brussels last week, banks and other private investors will contribute some €50 billion ($72 billion) to the rescue package until 2014 by swapping Greek bonds that they hold for new ones with lower interest rates or slightly lower face value

“Standard and Poor’s has concluded that the proposed restructuring of Greek government debt would amount to a selective default under our rating methodology,” the ratings agency said. “We view the proposed restructuring as a ‘distressed exchange’ because, based on public statements by European policymakers, it is likely to result in losses for commercial creditors.”

On Monday, Moody’s ratings agency downgraded Greece by three notches and warned that it is almost inevitable the country will be considered to be in default following the new bailout package.

There was no immediate comment from Athens. Responding to the Moody’s downgrade, government spokesman Elias Mossialos had said it was of “no practical value,” arguing that domestic lenders can now count on secure credit lines.

He also suggested that Greece should cancel its subscriptions to international ratings agencies.

Greece‘s brush with default will be a humbling first for a country using the euro. But the immediate practical consequences of the rating for Greece should be limited.

For weeks, the overriding fear was that, because of the bad rating, already struggling Greek banks would be frozen out of the European Central Bank’s emergency liquidity operations.

However, last week eurozone leaders found a way around that threat by promising to temporarily deposit €35 billion ($50 billion) with the ECB to boost the creditworthiness of defaulted bonds used as collateral by Greek banks, until the default rating has been lifted.

Crucially for Greece and Europe as a whole, the International Swaps and Derivatives Association, a trade association, said the new rescue deal is not expected to trigger payment of bond insurance because private sector involvement is voluntary.

Earlier Wednesday, Greece appointed BNP Paribas, Deutsche Bank and HSBC to act as dealer-managers for a voluntary private sector participation scheme, under the second financial bailout.

Cleary Gottlieb Steen and Hamilton LLP was also appointed international legal adviser, while Lazard Freres will be the financial adviser.

Under the voluntary plan, banks and other large private investors will swap Greek bonds for new debt instruments with longer maturities.



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