Europe May Face More Ratings Cuts, Greek Default, S&P Says

By Anchalee Worrachate - Mar 8, 2011 12:45 PM PT


Some countries in the euro region may have their credit ratings cut further while a Greece debt default is a “possibility,” said Moritz Kraemer, managing director of European sovereign ratings at Standard & Poor’s.

Asked if the worst was over for the region’s sovereign credit-rating outlook, Kraemer said: “I wish I could say yes, but the answer is no.”

The debt ratings of Portugal and Greece remain at risk of being cut due to concern about how a European Union rescue fund may affect holders of the two nations’ sovereign bonds, S&P said March 1. Ireland retained a negative outlook after S&P cuts its ratings on Feb. 2. Moody’s Investors Service downgraded Greece’s government bond ratings yesterday to B1 from Ba1, and assigned a negative outlook to the rating.

“We still have a number of countries with a negative outlook or CreditWatch negative, indicating their credit ratings may be going down further,” Kraemer said in an interview at a EuroMoney conference in London. “Trigger points for that could be slippage in fiscal consolidation and structural reforms, but also decisions that will be taken at the European level later this month.”

Greek 10-year bond yields and credit-default swaps surged to a record as borrowing costs increased at a debt sale and before European leaders begin meetings aimed at containing the sovereign debt crisis.
Recovery Levels

Spanish bonds also slid as the government sold debt through banks. Greek bond losses extended declines to a ninth day after the nation’s credit rating was cut by Moody’s. Portuguese 10- year bonds fell for a second day before a notes auction tomorrow. German 10-year bonds dropped amid speculation the nation’s economic growth will add to pressure on central bankers to increase interest rates.

A debt default by the Greece’s government is “a possibility” and that investors may recover between 30 percent and 50 percent of the total value if that happens, Kraemer said. Greece is rated BB+ by S&P, or one level below investment grade.

“We do rate Greece as a non-investment grade for about a year now, so clearly a default is a possibility,” said Kraemer. “Defaults out of investment grade are extraordinarily unlikely and we don’t think there will be any.”
Further Downgrades

The Greek Finance Ministry said yesterday that Moody’s decision was “incomprehensible.” Moody’s didn’t heed the progress Greece made in cutting the deficit by 6 percentage points of gross domestic product last year, according to a ministry statement.

Ireland, also at risk of further downgrades based on its outlook at S&P, may fare better than Greece as the country has the “economic resilience and adaptability to face up to its challenge,” Kraemer said.

European Union policy makers intends to approve “comprehensive” package of measures at a March 24-25 summit in a bid to restore confidence in bond markets. This may include setting up a permanent rescue facility, known as the European Stability Mechanism, which will take over the existing mechanism after 2013.

Credit ratings of some euro-region countries, particularly Greece and Portugal, will also depend on the outcome of the summit, Kraemer said.
Yields Climb

“Our concerns about features that we believe will be part of it have to do with the preferred credit status effectively subordinating senior bondholders, and also the possibility to introduce conditionality for lending that would entail the restructuring of commercial debt,” said Kraemer. “Both of those we would consider bad news for bondholders.”

As a consequence, S&P “would consider downgrading ratings of countries that are possible clients of the ESM after 2013,” he said. “These countries, in the first instance, are Portugal and Greece.”

The yield on 10-year Greek bonds jumped as much as 52 basis points to 12.85 percent, the most since Bloomberg began collecting the data in 1988, with the increase in yields the biggest since Oct. 27. It was at 12.84 percent as of 5 p.m. in London. The 6.25 percent securities maturing in June 2020 fell 2.04, or 20.4 euros per 1,000-euro ($1,389) face amount, to 65.29.

The extra yield investors demand to hold the securities instead of German bunds widened to as much as 956 basis points, the most since Jan. 10. The euro fell 0.4 percent to $1.3912.

Credit-default swaps insuring Greek government bonds rose five basis points to an all-time high 1,037 basis points, meaning it costs $1.04 million annually to insure $10 million of debt for five years. They ended the day seven basis points lower at 1,025 basis points.