UPDATE: S&P Cuts Greece to 'CCC-'; Outlook Remains Negative (GREK) (NBG)

June 29, 2015 2:19 PM EDT

(Updated - June 29, 2015 2:25 PM EDT)


  • We interpret Greece's decision to hold a referendum on official creditors' loan proposals as a further indication that the Tsipras government will prioritize domestic politics over financial and economic stability, commercial debt payments, and eurozone membership.
  • In our view, the probability of Greece exiting the eurozone is now about 50%.
  • Also, we believe that, absent unanticipated favorable changes in Greece's circumstances, a commercial default is inevitable within the next six months.
  • We are therefore lowering our long-term ratings on Greece to 'CCC-' from 'CCC' and affirming the 'C' short-term ratings.
  • The negative outlook indicates that we could lower the long-term ratings to 'SD' within the next six months in the event of a distressed exchange or nonpayment of Greece's commercial debt, including treasury bills.

On June 29, 2015, Standard & Poor's Ratings Services lowered its foreign and local currency long-term sovereign credit ratings on Greece (Hellenic Republic) to 'CCC-' from 'CCC'. The 'C' short-term ratings were affirmed. The outlook is negative.

As defined in EU CRA Regulation 1060/2009 (EU CRA Regulation), the ratings on Greece are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Calendar Of 2015 EMEA Sovereign, Regional, And Local Government Rating Publication Dates: First-Quarter Update," April 8, 2015, on RatingsDirect). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation.

In Greece's case, the deviation was prompted by the central government's decision to reject official creditors' loan proposals and instead schedule a national referendum on whether to accept the terms of the proposals. The deviation also reflects further deterioration since June 10 of liquidity conditions in Greece's banking system, which depends heavily on official financing from the Eurosystem, the eurozone's monetary authority. This led to the imposition of emergency capital controls in Greece as of yesterday.

The downgrade reflects our assessment that, in the absence of unanticipated favorable changes in circumstances, Greece will likely default on its commercial debt during the next six months.

In our view, the Greek government's decision to hold a national referendum on official creditors' loan proposals indicates that Prime Minister Alexis Tsipras will prioritize domestic politics over the country's financial and economic stability, commercial debt service, and membership of the eurozone. We interpret the government's inability to agree with official creditors on a loan program as a sign that it will likely miss payment obligations due on June 30, including the €1.5 billion owed to the International Monetary Fund (IMF).

Given that the government appears willing to accept the consequences on its banking sector and economy from the failure to reach an agreement, we now see a 50% likelihood of Greece eventually exiting the eurozone. Should this occur, Greece would permanently lose access to financing from the European Central Bank (ECB), which, in our opinion, would create a serious foreign currency shortage for the private and public sectors, potentially leading to the rationing of key imports such as fuel. Under our methodology, exit from the eurozone would lead us to revise our transfer and convertibility assessment on Greece to 'CCC' from 'AAA' to reflect the loss of a reserve currency and the foreign currency shortage this would create.

At present, the Eurosystem's support to Greek banks--directly through the ECB's main refinancing operations and indirectly via the Bank of Greece's Emergency Liquidity Assistance (ELA)--exceeds 70% of GDP, according to our estimates. Without it, Greece's payment system would shut down and its banks would not be able to operate. Despite further deposit withdrawals from Greek banks over the weekend, the ECB has decided not to increase the ceiling on the ELA to Greek banks from the €89 billion agreed on June 26.

The Greek Financial Stability Council has declared a bank holiday from June 29 until July 7, 2015. It has also introduced deposit withdrawal limits and controls on transfers abroad. An extended bank holiday involving capital controls will, in our view, further weigh on Greece's economy, which we expect will contract by 3% this year, although the margin of error on this figure is substantial. While failure to make tomorrow's IMF payment would not constitute a commercial default as defined by our criteria, it is a legal event of default under the December 2012 Master Financial Assistance Facility Agreement between Greece and the European Financial Stability Facility (EFSF). Our base-case expectation remains that, over the next several months, the EFSF is unlikely to demand accelerated payment on the €130.9 billion (equivalent to 75.1% of GDP) that it lent Greece.

We would not lower our long-term ratings on Greece to 'SD' should the government miss payments on bonds held by the ECB totaling €6.7 billion due in July and August. This is because our sovereign ratings pertain to the central government's ability and willingness to service financial obligations to commercial (that is, nonofficial) creditors (see paragraph 4 of "Sovereign Rating Methodology," published on Dec. 23, 2014), and we consider the ECB to be an official creditor (see also "Greece's Nonpayment of Bonds Held by ECB Would Not Constitute a Default Under Our Criteria," published June 15, 2015).

Greece's upcoming commercial debt payments include €2.0 billion in treasury bills due on July 10; €83 million on a Japanese yen obligation, due on July 14; and €71 million in interest, due on July 17 on a three-year commercial bond the government issued in July 2014. About €39 billion of Greece's total medium- and long-term debt is commercial, representing 22% of GDP. All of the remaining €261 billion in debt (excluding €15 billion in treasury bills) is owed to official creditors.

The negative outlook indicates that we could lower the long-term ratings to 'SD' within the next six months in the event of a distressed exchange or nonpayment of Greece's commercial debt, including treasury bills.

We could revise the outlook to stable if we believe that a new financial support program will be agreed, with policy conditions that satisfy both Greece and its official creditors.


Table 1

Greece Selected Indicators
--Year ended Dec. 31--
Nominal GDP (bil. US$)356.1331.2299.9289.2249.5242.3237.9189.4
GDP per capita (US$)32,12829,84026,99226,01022,42921,77421,38417,028
Real GDP growth (%)(0.4)(4.4)(5.4)(8.9)(6.6)(3.9)0.8(3.0)
Real GDP per capita growth (%)(0.6)(4.5)(5.5)(8.9)(6.6)(3.9)0.8(3.0)
Change in general government debt/GDP (%)10.215.312.912.4(26.4)7.9(1.2)(6.7)
General government balance/GDP (%)(9.9)(15.3)(11.1)(10.2)(8.7)(12.3)(3.5)(5.3)
General government debt/GDP (%)109.3126.8146.0171.3156.9175.0177.1177.7
Net general government debt/GDP (%)107.1125.1141.1167.0150.2167.7170.7177.0
General government interest expenditure/revenues (%)
Other dc claims on resident nongovernment sector/GDP (%)98.395.2118.8124.9122.9124.6124.2127.3
CPI growth (%)
Gross external financing needs/CARs plus usable reserves (%)359.9499.9545.5530.6471.7414.3349.7386.5
Current account balance/GDP (%)(14.4)(10.9)(9.9)(9.9)(2.4)0.60.9(3.6)
Current account balance/CARs (%)(52.5)(49.8)(41.6)(36.7)(7.9)1.82.5(10.4)
Narrow net external debt/CARs (%)315.3464.6502.7430.8541.2508.0414.9518.6
Net external liabilities/CARs (%)254.8406.5412.8291.6372.3379.4319.0419.9
Other depository corporations (dc) are financial corporations (other than the central bank) whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private-sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. CARs--Current account receipts. e--Estimate. The data and ratios above result from Standard & Poor's own calculations, drawing on national as well as international sources, reflecting Standard & Poor's independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

Table 2

Greece Ratings Score Snapshot
Key rating factors
Institutional assessmentWeakness
Economic assessmentNeutral
External assessmentWeakness
Fiscal assessment: flexibility and performanceNeutral
Fiscal assessment: debt burdenWeakness
Monetary assessmentNeutral
Standard & Poor's analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). Section V.B of Standard & Poor's "Sovereign Rating Methodology," published on Dec. 23, 2014 , summarizes how the various factors are combined to derive the sovereign foreign currency rating, while section V.C details how the scores are derived. The ratings score snapshot summarizes whether we consider that the individual rating factors listed in our methodology constitute a strength or a weakness to the sovereign credit profile, or whether we consider them to be neutral. The concepts of "strength", "neutral", or "weakness" are absolute, rather than in relation to sovereigns in a given rating category. Therefore, highly rated sovereigns will typically display more strengths, and lower rated sovereigns more weaknesses. In accordance with Standard & Poor's sovereign ratings methodology, a change in assessment of the aforementioned factors does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the assessments.

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