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Ratings On Greece Raised To 'B-/B' From Selective Default On Completion Of Debt Buyback; Outlook Stable

Publication date: 18-Dec-2012 12:05:07 EST



  • Greece has completed a distressed debt buyback.
  • Following completion of the transaction, we are raising our long- and short-term sovereign credit ratings on Greece to 'B-/B' from 'SD' (selective default).
  • The upgrade reflects our view of the strong determination of European Economic and Monetary Union (eurozone) member states to preserve Greek membership in the eurozone.
  • The outlook on the long-term rating is stable, balancing our view of the government's commitment to a fiscal and structural adjustment against the economic and political challenges of doing so.

LONDON (Standard & Poor's) Dec. 18, 2012--Standard & Poor's Ratings Services 
today raised its long-term foreign and local currency sovereign credit ratings 
on the Hellenic Republic (Greece) to 'B-' from 'SD' (selective default). We 
also raised our short-term foreign and local currency sovereign credit ratings 
on Greece to 'B' from 'SD'. As a result, we have raised the ratings on all the 
outstanding issues, including those guaranteed by Greece, to 'B-/B'. The 
outlook is stable.

The rating action reflects the completion on Dec. 17, 2012, of Greece's 
distressed debt buyback (see "Greece Ratings Lowered To 'SD' (Selective 
Default)," published Dec. 5, 2012, on RatingsDirect on the Global Credit 
Portal), in tandem with approval by the Eurogroup (the finance ministers of EU 
member states belonging to the eurozone) of a loan disbursement to Greece 
under the second economic adjustment program. We view the eurozone member 
states' decision to provide material cash flow relief to Greece as indicative 
of their determination to restore stability to Greek finances, and to preserve 
Greece's eurozone membership.

Our criteria define the emergence from a sovereign default (short of resuming 
payment on the defaulted instrument) as the successful completion of an 
exchange offer or buyback. As the Greek buyback applied to only part of an 
issue--because some holders declined to participate in the transaction--we are 
raising the ratings on the original securities that remain outstanding. This 
reflects our opinion that Greece will likely continue to pay full debt service 
as originally contracted.

Under our criteria, the 'SD' 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).

We estimate €6.8 billion in foreign-law-governed bonds held in the market was 
not tendered in the March 2012 Greek commercial debt restructuring. If 
Greece's official debt were written-down--which could happen if Greece were to 
apply for a third European Stability Mechanism program in 2013 or 
2014--eurozone official creditors may seek comparability of treatment for 
holders of outstanding foreign-law-governed bonds.

Even after the buyback, Greece's end-2012 net debt-to-GDP ratio of over 160% 
of GDP remains onerous. Nevertheless, subject to Greece meeting program 
conditions, eurozone member states have said they would significantly improve 
official lending terms to the government. The improved terms would include 
maturity extensions on bilateral and EFSF loans on top of a 10-year deferral 
of Greek interest payments to the EFSF: an effective write down of the Greek 
public debt stock in net present value terms, assuming nominal GDP growth 
starts gradually recovering from 2014.

The Economic Adjustment Program for Greece is scheduled to end in 2014, based 
on the assumption that Greece will be able to return to issuing medium- and 
long-term commercial debt by 2015. In our view, however, Greece's access to 
long-term commercial funding remains subject to numerous domestic and external 
uncertainties.

The Eurogroup has today released €34.3 billion to Greece, €16 billion of which 
will be used to increase Greek banks' regulatory capital. The Greek government 
is likely to keep meeting a portion of its financing needs by issuing Treasury 
bills, and we anticipate the freshly recapitalized domestic banks will be 
important buyers of these.

Greece's fiscal consolidation is largely premised on tax hikes and improved 
tax collection, an extensive privatization program, and wholesale cuts in 
government spending (adopted in November 2012). We believe these adjustments 
carry implementation risks given the projected further output contraction in 
2012 and 2013, which will likely see social pressures persist.

Badly needed net equity inflows into the real economy have not yet 
materialized in any material fashion. In this regard, the government has 
repeatedly failed to meet its privatization receipt targets--one reason behind 
this year's increased financing needs. At the same time, we believe a 
better-capitalized banking system and indications of a gradual restoration in 
private sector competitiveness could improve prospects in 2013 for Greece's 
more competitive sectors, particularly tourism.

The stable outlook balances our view of eurozone member states' determination 
to support Greece's eurozone membership and the Greek government's commitment 
to a fiscal and structural adjustment against the economic and political 
challenges of doing so.

We could raise our long-term rating on Greece if the government follows 
through fully on its steps to comply with the EU/IMF program, thereby 
restoring predictability to its policymaking as well as contributing to a 
sustained economic recovery and improved prospects of sustainable 
debt-servicing.

We could lower the ratings if we believe that there is a likelihood of a 
distressed exchange on Greece's remaining stock of commercial debt.


RELATED CRITERIA AND RESEARCH
Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. 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) 
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Analytical Group Contact:SovereignEurope;
SovereignEurope@standardandpoors.com

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