28.02.2012

By Simon Miller

The European Central Bank (ECB) has suspended the use of Greek bonds for collateral following Standard & Poor’s (S&P) decision to downgrade Greece to an ‘SD’ in the belief that it has entered a selective default.

The ratings agency said that the retrospective introduction of collective action clauses (CAC) into the bond swap had led to the dropping of Greece’s rating from ‘CC’.

In its statement, S&P said: “In our opinion, Greece's retroactive insertion of CACs materially changes the original terms of the affected debt and constitutes the launch of what we consider to be a distressed debt restructuring. Under our criteria, either condition is grounds for us to lower our sovereign credit rating on Greece to ‘SD’ and our ratings on the affected debt issues to ‘D’. “

It added that although CACs did not suggest the government changing its incentive to pay, S&P believed that “the retroactive insertion of CACs will diminish bondholders' bargaining power in an upcoming debt exchange”.

The agency said it would review its rating when the bond swap is implemented sometime before 12 March but warned that “if a sufficient number of bondholders do not accept the exchange offer, we believe that Greece would face an imminent outright payment default. This is because of its lack of access to market funding and the likely unavailability of additional official financing”.

In a statement, the Greek Finance Ministry commented: “This move was pre-announced and all its consequences have been anticipated, planned for and addressed by the relevant decision of the European Council and the Eurogroup. The downgrade has no impact in the Greek banking sector as its liquidity effect has been addressed by the Bank of Greece, and consequently by the EFSF.”

The action follows Fitch Ratings which downgraded last week while Moody’s Investors Service has announced that it too will be cutting the country’s rating.

As a result, the ECB has decided to temporarily suspend Greek debt instruments for use as collateral in Euro system monetary policy operations.

In a statement, the ECB added: “This decision takes into account the rating of the Hellenic Republic as a result of the launch of the private sector involvement offer.

“At the same time, the Governing Council decided that the liquidity needs of affected Euro system counterparties can be satisfied by the relevant national central banks, in line with relevant Euro system arrangements (emergency liquidity assistance).”