“Greece will default -- it's a question of when, rather than if,” Vincent Truglia, Managing Director at New York-based Granite Springs Asset Management LLP and a former head of the sovereign risk unit at Moody's, said in an interview. “It's a basic solvency issue rather than a liquidity issue. Only a debt writedown will do.”
Swaps on Greece jumped 47 basis points to an all-time high of 1,610 as of 5:30 p.m. yesterday in London after the S&P downgrade, according to CMA. Contracts on Ireland soared 27 basis points to 740, Portugal climbed 22 to 764 and the Markit iTraxx SovX Western Europe Index of swaps on 15 governments jumped 7 basis points to 218, approaching the record 221.75 set Jan. 10.
The yield difference, or spread, between 10-year German bunds and Greek securities of a similar maturity was at 1,402 basis points yesterday, close to a record.
No other sovereign nation is graded as low as CCC by S&P, a spokesman said by e-mail. Moody's cut its rating on Greece to Caa1 on June 1, leaving only Ecuador as a worse sovereign risk.
“The ratings agencies are now playing catch-up with the market,” said Gianluca Salford , a fixed-income strategist at JP Morgan in London. “The market is pricing in a very high probability that there will be a credit event around Greece. The agencies are just catching up to the negativity that's already priced in by the market, not the other way around.”
The downgrade comes as the European Central Bank and Germany battle over how to bail out Greece again and whether officials should push creditors to share some of the costs. ECB President Jean-Claude Trichet said yesterday that his advice to European governments is to “avoid what would be a compulsory concept” and “avoid whatever would trigger” a default.
“The ECB wants governments to come to the aid of Greece and at the moment that doesn't seem to be the case,” said Orlando Green , a fixed income strategist at Credit Agricole Corporate & Investment Bank in London . “We do think there's a chance Greece will see some sort of adjustment of its debt profile. That's what the politicians are looking to do, effectively adjust their debt situation without wrecking havoc, which could easily have a contagion effect.”
S&P said it has a negative outlook on Greece's debt.
“Our negative outlook indicates that a downgrade to ‘SD' could occur if Greece undertakes one or more debt restructurings or maturity extensions on terms that constitute distressed debt exchanges as defined by our criteria,” S&P said. SD is a “selective default.” A restructuring would likely “result in one or more defaults under our criteria,” it said.
S&P said that its recovery rating on Greece's debt is ‘4,' indicating it estimates bondholders would recover 30 percent to 50 percent of their investment.
A “financing gap has emerged in part because Greece's access to market financing in 2012 and possibly beyond, as envisaged in the current official EU/IMF program, is unlikely to materialize,” the report said.
Greece's finance ministry said in a statement that S&P's decision “ignores” the “intense consultations” to resolve the nation's crisis taking place between officials at the European Commission, European Central Bank and International Monetary Fund .
“The decision by Standard and Poor's also neglects the determined efforts of the Greek government to avoid at any costs any possible violation of Greece's contractual obligations, and the strong desire of the Greek people to plan for their future within the euro zone,” the statement said.
Granite Springs's Truglia said that European officials should prepare for the fallout from a Greek default.
“What Europe's governments should do now is look at the knock-on effects that will have for other markets and pressure that will exert on banking system,” he said. “But the problem is that governments always leave it too late.”