Fresh from S&P on Monday:
Standard & Poor’s Ratings Services today said that it has lowered its long- and short-term sovereign credit ratings on the Hellenic Republic (Greece) to ‘B’ and ‘C’, from ‘BB-’ and ‘B’, respectively…
The downgrade reflects our view of increasing sentiment among Greece’s key eurozone official creditors to extend the debt payment maturities of their €80 billion of bilateral loans pooled by the European Commission. As part of such an extension, we believe the eurozone creditor governments would likely seek “comparability of treatment” from commercial creditors in the form of their similarly extending bond and loan maturities.
Such private sector burden sharing would likely constitute a distressed exchange according to our criteria, for which we assign a rating of ‘SD’ for selective default. Even if there were no discount of principal, such an extension of maturities is generally viewed to be less favorable to commercial creditors than repayment according to the original terms of the debt.
Although an extension of maturities with no principal discount would likely imply a recovery greater than 50%, our projections suggest that principal reductions of 50% or more could eventually be required to restore Greece’s debt burden to a sustainable level, given trend growth potential of the Greek economy.
This is exactly what S&P and other agencies did in Uruguay’s famous 2002 maturity swap. Here’s a chart from a 2003 IMF paper (click to enlarge):
(NB — note the footnote in that chart. The FT’s Richard Milne tells us that S&P has now just about kept Greece at speculative grade for more than a year…)
The ratings move was somewhat technical. Though Uruguay swapped in order to avoid a default, hence the default rating, illiquidity rather than insolvency was the problem and ratings agencies upgraded fairly quickly in accordance. Indeed it may actually have helped to go into default before the maturity swap, since many investors would have been made to sell by the rating change, thus reducing the amount of parties in a debt exchange.
But if Greece must wait until 2013 to restructure in a way that makes economic sense… and it’s quite possible to structure any maturity swap so that CDS doesn’t trigger — despite the ratings agencies going to default — this could get quite messy.
Anyway, about those maturities…
There is a lot of debate to be had over a Greek maturity swap; principally over whether it can limit fiscal transfers via further lending, prevent CDS triggering, tide Greece over before a safe restructuring in 2013, and so on.
But one basic question first: what maturities in particular?
Here’s a chart via the Greek debt office itself, which shows that there’s $38bn-$40bn of private Greek bonds maturing between 2012 and 2013 (compared to a €300bn-plus debt stock):
But there are two complicating points, really.
First — there should be some disbursements available from the original bailout loans for covering a few billion of this redeeming debt. As for extra loans, we do have a first figure for what’s been put on the table: €20-25bn, according to Les Echos. But again – these are fiscal transfers: a large portion of these loans won’t be coming back due to a future haircut. In any case, there isn’t much room to cover the redemptions.
The second complicating point — it’s not all short-dated debt that matures 2012-2013. There are some three-year bonds maturing (charts again via the PDMA):
But it’s much more medium-term and benchmark-sized five-year and 10-year bonds:
So Greece would potentially have to negotiate with ‘volunteer’ bondholders across the yield curve or decide which bonds are worth swapping the most. Especially, it’s not at all clear that holders of longer-date bonds would be the volunteering type (pension funds and so on) who’d be keen to experience first a haircut on net present value, and then a haircut on face value further out towards 2013.
Like we said. Messy.
Related links:
Hurdles to a Greek debt restructuring – FT Alphaville
The market for sovereign default recoveries – FT Alphaville