The Banking and Strategy Initiative

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European Sovereign Debt Crisis: The secret of the S&P Greece downgrade

Greece was downgraded to a “selective Default” outlook earlier today actioning the loss of bondholders’ rights from the new CACs inserted in the Greek Government bonds retroactively. As the new bonds there after once the bond offer is exchanged to new UK law bonds of smaller face value, another ratings action will be employed by S&P to rerate Greece upwards. Changes in bond covenants are always treated as default and this was a retroactive change. A Collective Action Clause enables the issuer, Greece to force the acceptable terms of the deal on all dissenting bondholders. the bond offer completes on March 12. That wil take back Greece’s rating f rom CC+ to CCC in the middle of March and new bonds will not pay more than a 3.25% coupon til 2020

As some bond repayment will be in cash and the profits to European Central Banks redistributed in different ways to Greek government to help pay back its debt and also upto EUR 4 bln in Principal and Interst that Central Banks will forego, means that March 12 could also hold a much better Debt to GDP ratio which unfortunately  is not on the items prioritised by S&P on its ratings rote for Sovereigns and even banks. Eventually DSCR will improve if contraction in GDP due to cost cutting remains within reason.


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