Fitch Downgrades Greece To “C” From “CCC”

In a sign that the refinancing of Greece will not be universally heralded as a solution to its economic problems, and probably not those of the eurozone, Fitch downgraded it to “C” from “CCC”

Part of the reasoning for the downgrade was a criticism of the controversial debt exchange which cut the value of the holdings in Greece paper by private investors by as much as 70%.

The credit rating agency writes

Fitch Ratings has downgraded Greece’s Long-term foreign and local currency Issuer Default Ratings (IDRs) to ‘C’ from ‘CCC’. The Short-term foreign currency rating is affirmed at ‘C’. The agency has also affirmed the euro area Country Ceiling at ‘AAA’, which is applicable to all euro area member states. The downgrade follows yesterday’s Eurogroup statement on a second financing programme for Greece including ‘private sector involvement’ (PSI) and a subsequent announcement from the Greek authorities outlining the terms of the proposed exchange of Greek Government Bonds (GGBs). The rating action is in line with Fitch’s statement on 6 June 2011, which outlined its rating approach to a sovereign debt exchange (see ‘Fitch Outlines Rating Approach to a Sovereign Debt Exchange’).

The Eurogroup communique acknowledges that a common understanding has been reached between the Greek authorities and the private sector on the general terms of a ‘private sector involvement’ (PSI) exchange offer, including a nominal haircut of 53.5% to the face value of GGBs. The subsequent statement from the Greek authorities expands on the terms of the debt exchange and confirms the Greek government’s intention to introduce collective action clauses (CACs) into those GGBs governed by Greek law.

In Fitch’s opinion, the exchange, if completed, would constitute a ‘distressed debt exchange’ (DDE) in line with its criteria and consequently yesterday’s announcements set in motion the agency’s process for reviewing Greece’s issuer and debt securities ratings. The sovereign IDR has accordingly been lowered to ‘C’ from ‘CCC’ indicating that default is highly likely in the near term. The ratings of the securities subject to the exchange have also been lowered to ‘C’ from ‘CCC’.

Fitch considers that the proposal to reduce Greece’s public debt burden via a debt exchange with private creditors will, if completed, constitute a rating default, and result in the country’s IDR being lowered to ‘Restricted Default’ (‘RD’) upon completion. The ratings of GGBs affected by the exchange, including those not tendered but restructured under CACs, which are expected to be imposed retrospectively on bonds issued under Greek law, will also be lowered to ‘D’ (‘default’) at this time.

Shortly after completion of the exchange with the issue of new securities, Greece’s sovereign rating will be moved out of the ‘RD’ category and re-rated at a level consistent with the agency’s assessment of its post-default structure and credit profile.

Fitch regards the imposition of retrospective CACs as a material adverse change in the terms and conditions of GGBs in the context of an imminent debt exchange and confirms its assessment that the exchange will be distressed and de facto coercive on private holders of Greek bonds. Nonetheless, the primary credit event is the exchange itself and Fitch will rate Greece and its securities accordingly.