S&P Warns of Greece Downgrade, Very Late

Did you hear?  Greece has problems.  They are bad enough that S&P has threatened a sovereign downgrade on the debt of Greece.  Just one problem here, or more than one.  This call is about as late as late can get.  While it is a late call, this has implications on a proposed capital structure change that could affect the PIIGS and any other Euro-nations which ever run into credit default risk.  S&P put Greece’s BB+ long-term sovereign credit rating on Greece on watch for another downgrade.  It is already at junk status but that is the highest junk rating.

Standard & Poor’s Ratings Services came out after the close of trading on Thursday with a warning that it is considering another debt rating downgrade on the nation’s ratings.  It seems that the issue is assessing a European Union treaty which could change the creditor seniority of the credit line when it comes to private sector investors.

Apparently, the proposed change implies a permanent mechanism where the E.U.’s stability mechanism would have a higher spot in the capital structure of the line of creditors and one which would be ahead of private creditors in future debt restructurings in 2013 and beyond.  In a sense, this gives that stability mechanism a higher or preferred creditor status in future debt that could skip others in the repayment lines if a default were to come about.

This is still something under development and is not set in stone.  In a sense, it would be almost like the U.S. suddenly stepping in line as a late-comer in the default process of sovereign debt and skipping right in front of all other senior and junior creditors regardless of the capital structure laws that govern the land.  That already partially exists, but that is another conversation for a different bit.

S&P earlier brought concerns about this on Portugal’s debt ratings, which were also put on watch for a debt downgrade.  Needless to say repetitively, this is a late call.  It is the potential capital structure that is a concern here.  If taken to the extreme, it could put create great ripples in corporate law and contract law which could greatly disrupt the desire for private sector investors to ever buy debt of these nations.

JON C. OGG