–Regardless Of Haircut, Debt Swap Would Be A ‘Selected Default’
–Greece’s Recovery Rating Means Expected Loss Between 50% And 70%
–Crisis Is One Of Individual Countries, Not Of The Eurozone

By Yali N’Diaye

WASHINGTON (MNI) – Given Greece’s difficulties implementing its
program of fiscal austerity and in reviving economic growth,
implementing the debt swap deal currently under consideration by EMU
leaders could well be only a first step with more debt exchanges likely
to come, Standard & Poor’s indicated.

Besides, Greece’s recovery rating implies expected losses of 50% to
70%, compared with a haircut of just over 20% that banks would be asked
to take under a proposal being considered by eurozone members.

Below-investment grade issuers are all assigned a recovery rating,
and that of Greece is 4, which corresponds to an expected loss for
investors of 50% to 70%, Standard & Poor’s analysts reminded during an
interview with Market News International.

Markets have been anxious about contagion of the crisis hitting
larger economies with potential repercussions globally.

Yet, when asked about the risk of contagion of the sovereign debt
crisis to other larger countries, Head of S&P’s EMEA Sovereigns &
International Public Finance Ratings Myriam Fernandez de Heredia noted
that Standard & Poor’s doesn’t “think it is a euro zone crisis.”
Instead, “It’s a crisis of individual countries within the euro zone.”

According to Standard & Poor’s, indeed, the rating actions recently
taken “have more to do with individual creditworthiness and policy
actions of the different governments than what is going on in the euro
zone as a whole.”

Besides, Fernandez de Heredia pointed out that the negative actions
taken on the small EMU countries only amount to downgrading the weighted
average of the euro zone by one or two notches.

She underlined that triple-A and AA-rated countries have kept their
ratings, noting downgrades have focused on some individual countries.

And while markets continue to fear a widespread contagion,
Fernandez de Heredia argued that Standard & Poor’s views can differ from
those of the markets, pointing out that 10 years ago, markets
undershot, while today, in some cases, they are overshooting.

Pointing out the case of Greece, Portugal, Spain and Italy where
spreads have significantly widened, “We don’t believe that
fundamentally,” she said, “this is really warranted.”

Still, in the case of Greece, it seems even the debt-swap deal
under consideration would at best be an interim step that would leave
the country in the speculative category.

“Because the debt is so high in Greece, because they have
difficulties in implementing the program, finding the motor for growth,
we think that even if they go ahead with this transaction, there is
still a likelihood that there might be further debt exchanges in the
future, which would be reflected by keeping rating in low speculative
grade,” Fernandez de Heredia said.

She reiterated what rating agencies had warned: “The proposal that
was put on the table on the debt exchange for us would be a default
regardless of the level of haircut that you have.”

S&P’s Global Criteria Officer for Sovereign Ratings Alexandra
Dimitrijevic reminded during the interview with MNI that the methodology
allows the rating agency to assess — whenever there is a debt exchange
— whether the transaction is part of an active debt management
strategy, in which case it is not a default, or whether it is a
“distressed” situation. In the latter case, it would be a default.

The methodology sets two conditions.

First, the rating agency must determine whether the debt exchange
was “opportunistic” or “distressed.”

An opportunistic deal would be considered as “active debt
management” while a “distressed” scenario implies that investors enter
the deal to avoid a situation that would evolve into a conventional
default, forcing them to take a larger haircut.

Whenever an entity is rated B- or lower, Standard & Poor’s
considers that most likely the investor is in the exchange due to its
“distressed” nature.

Second, the rating agency looks at the value of the bond for the
investor under the new proposal compared with “the initial promise made
by the issuer,” seeking to determine whether the bond value is lower.

In the case of Greece, should the proposed transaction materialize,
“you have the two characteristics that would lead us to consider this
transaction as a default,” Dimitrijevic commented.

As a result, “It’s not the size of the haircut which would
influence our decision,” Fernandez de Heredia said.

Under a scenario where the debt swap would go through, Greece would
be put on selective default (SD) and Standard & Poor’s would reassess
the country’s creditworthiness and come up with a new rating, that takes
into account the debt exchange.

The rating could be maintained, lowered or increased depending on
how the agency sees Greece’s new credit fundamentals under the new
scenario.

Usually the time frame is “short,” Fernandez de Heredia said,
meaning a few days to a few weeks.

The bonds that are not subject to SD will then be moved to the new
rating.

Still, there is no chance Greece would exit its speculative status
as Standard & Poor’s has already published that the rating would remain
in the low speculative grade category after default should the
transaction go through.

This is in line with loss expectations of 50% to 70% implied by the
recovery of 30% to 50% associated with a recovery rating of 4.

In association with a proposed new official E109 bailout package
for Greece, private creditors have been offered various options to
exchange their Greek bonds expiring between now and 2020 for new
securities with maturities of 15 or 30 years. In addition to accepting
postponed repayment, the private creditors would also be getting lower
coupon payments in some cases.

The deal is also expected to produce a “haircut” of about 21% on
the face value of the bonds that are exchanged. Greece has said that its
target in the deal is 90% participation of private banks holding the
bonds included In the exchange offer. Many banks are still deciding
whether to participate in the deal, and the constantly evolving
situation in Greece, including incessant rumors of an imminent default,
can only complicate their calculations.

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: M$$CR$,MGX$$$,M$Y$$$.MX$$$$,MR$$$$,M$U$$$,M$X$$$,M$U$$$]