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Ratings On Greece Raised To 'CCC' From Selective Default Following Completion Of Debt Exchange; Outlook Stable

Publication date: 02-May-2012 05:39:47 EDT

  • Greece has completed a distressed debt exchange.
  • Following completion of the exchange, we are raising our long- and short-term sovereign credit ratings on Greece to 'CCC/C' from 'SD' (selective default).
  • The outlook on the long-term rating is stable, balancing our view of the government's stated commitment to improving its fiscal track record and effecting a material fiscal adjustment, against the economic and political challenges of doing so.

LONDON (Standard & Poor's) May 2, 2012--Standard & Poor's Ratings Services 
today raised its long-term local and foreign currency sovereign credit ratings 
on the Hellenic Republic (Greece) to 'CCC' from 'SD' (selective default). 
Standard & Poor's also raised its short-term foreign and local currency 
sovereign credit ratings on Greece to 'C' from 'SD'. The outlook on the 
long-term rating is stable.

The rating action reflects the completion on April 25, 2012, of Greece's 
distressed debt exchange (see "Greece Remains In Selective Default; New Bond 
Issues Rated 'CCC'," published March 15, 2012 on RatingsDirect on the Global 
Credit Portal) in respect of its non-Greek-law governed bonds.

Standard & Poor's criteria defines emergence from a sovereign default (short 
of resuming payment on the defaulted instrument) as the successful completion 
of an exchange offer, even if nonparticipating creditor debt remains unpaid 
(see "Argentina Emerges From Default, Although Some Debt Issues Are Still 
Rated 'D'," published June 1, 2005). As a consequence, we are withdrawing the 
issue ratings on the bonds tendered in the exchange. Untendered bonds will 
remain with a 'D' rating until the next principal payment debt of May 15, 
2012, at which point they will be raised to the sovereign rating, if paid, or 
left at 'D' if unpaid.

Under Standard & Poor's criteria, the 'D' credit ratings of a sovereign 
government emerging from default are replaced by new ratings reflecting our 
revised view of that sovereign's creditworthiness (see Appendix B in "Sovereign
Government Rating Methodology and Assumptions," June 30, 2011).

While the exchange has, in our view, alleviated near-term funding pressures, 
Greece's sovereign debt burden remains high. To place its financial position 
on a sustainable footing, the government has been implementing a significant 
deficit reduction strategy in the context of the extended IMF Stand-By 
Arrangement, with substantial financial support from members of the European 
Economic and Monetary Union. Besides reducing the deficit, Greece has 
undertaken commercial debt restructuring to reduce its overall debt burden.

The fiscal consolidation underway is largely premised on tax hikes and 
improved tax collection, an extensive privatization program, and wholesale 
cuts in government spending. We believe this adjustment has implementation 
risks given the likely further contraction of the sovereign's GDP this year 
and next, which will likely result in persistent social pressures. The 
adjustment in our view will be particularly challenging after the upcoming May 
6 parliamentary elections. Moreover, additional, albeit yet unspecified, 
deficit-reducing measures are likely to further exacerbate popular discontent 
with Greece's budgetary consolidation strategy.

The 'CCC' rating on Greece reflects our view of the recent reduction in 
government debt following the restructuring, the reduction in debt servicing 
costs as a result of the exchange, and the increased average maturity of the 
central government debt stock. It also reflects our view of the significant 
stresses on Greece's creditworthiness, including:

  • Uncertain economic growth prospects. Following a 6.9% contraction in GDP in 2011 in real terms, we expect the recession to continue in 2012 as GDP shrinks by around 5%, reflecting contracting domestic demand and negative credit growth. We expect the economic recovery to take place in the medium term if the planned structural reforms are fully implemented, while fiscal contraction eases and investment appetite gradually recovers.
  • Weakening political consensus for ambitious and largely unpopular reforms. Greece faces sizable implementation risks to the ambitious fiscal consolidation targets under its second financial assistance program.
  • Greece's large, albeit narrowing, external deficit. Despite a severe and prolonged economic recession, Greece's current account deficit (CAD) to GDP ratio has narrowed only moderately to 9.8% of GDP in 2011 from its peak in 2008 of 14.9% of GDP, reflecting structural weaknesses in the Greek economy. During the first two months of 2012, despite rising oil prices, the CAD narrowed further on the back of a substantial decline in the non-oil trade deficit, implying a full-year 2012 CAD of below 6% of GDP. During 2012, the deficit has largely been financed by net EU transfers to the general government.
  • At an estimated 52% of GDP (€107.3 billion) as of end-February 2012, the Bank of Greece Target2 balance with the ECB remains at elevated levels, signifying the Greek financial sector's continued dependency on official sector funding.
  • A high government debt burden, even following completion of the exchange resulting in the new bonds' increased average maturity and the reduction in Greece's debt service costs. We expect government debt to range between 160% and 170% of GDP in the period 2012-2015, depending on Greece's compliance with the EU/IMF financial program targets. These targets depend on Greece's underlying GDP growth as well as its ability to generate privatization revenues.
The rating on Greece is supported by our view of:
  • A relatively high level of income per capita. At $26,700 at the end of 2011, GDP per capita is high among its peers, even though consecutive years of recession have resulted in a significant decline from above $30,000 in 2008.
  • The supportive financial sector policy, as reflected in stability measures. Despite severe macrofinancial challenges faced by domestic financial sector institutions, these measures have limited the stress on domestic depositary confidence including during the period of debt restructuring.
Our recovery rating of '4' for Greece remains unchanged, indicating an 
estimated 30%-50% recovery by bondholders.

The stable outlook balances our view of the government's stated commitment to 
improving its fiscal track record and effecting a material fiscal adjustment, 
against the economic and political challenges of doing so. We could raise our 
long-term rating on Greece if the new government takes tangible steps to 
comply with the EU/IMF program, thus restoring predictability in its 
policymaking efforts, as well as contributing to a sustained economic 

The ratings could be lowered if we believe that there is a likelihood of a 
distressed exchange on Greece's remaining stock of commercial debt.

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left 
column.  Alternatively, call one of the following Standard & Poor's numbers: 
Client Support Europe (44) 20-7176-7176; London Press Office (44) 
20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm 
(46) 8-440-5914; or Moscow 7 (495) 783-4009.
Additional Contact:Sovereign Ratings;

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