Greece Defaulted After All

greece parthenonMoody's has proclaimed Greece defaulted.

Moody's Investors Service says that it considers Greece (C/no outlook) to have defaulted per Moody's default definitions further to the conclusion of an exchange of EUR177 billion of Greece's debt that is governed by Greek law for bonds issued by the Greek government, GDP-linked securities, European Financial Stability Facility (EFSF) notes. Foreign-law bonds are eligible for the same offer, and Moody's expects a similar debt exchange to proceed with these bondholders, as well as the holders of state-owned enterprise debt that has been guaranteed by the state, in the coming weeks. The respective securities will enter our default statistics at the tender expiration date, which is was Thursday 8 March for the Greek law bonds and is currently expected to be 23 March for foreign law bonds. Greece's government bond rating remains unchanged at C, the lowest rating on Moody's rating scale.

Moody's understands that 85.8% of debtholders holding Greek-law bonds issued by the sovereign have agreed to the exchange, with the vast majority of remaining bondholders likely to be drawn in following the exercise of Collective Action Clauses that will be inserted pursuant to a recent Act by the Greek parliament. The terms of the exchange entail a discount -- a loss to creditors -- of at least 70% on the net present value of existing debt.

According to Moody's definitions, this exchange represents a 'distressed exchange', and therefore a debt default. This is because (i) the exchange amounts to a diminished financial obligation relative to the original obligation, and (ii) the exchange has the effect of allowing Greece to avoid payment default in the future. (See also

Moody's announcement has no implications for Greece's issuer rating, which remains C. Moody's does not use a 'Default' or 'Selective Default' rating, but rather maintains ratings on securities in default that are indicative of the magnitude of expected losses to investors. The securities subject to the default are listed at the end of this announcement.

Moody's will revisit Greece's rating in due course to assess the impact of the exchange on the sustainability of Greece's debt burden together with other relevant factors, including Greece's likely compliance with measures that are a condition of external support and its growth prospects.

Moody's had downgraded Greece's sovereign rating to C from Ca on 2 March 2012 further to the announcement of the debt exchange proposals. Moody's had assessed these as implying expected losses to investors in excess of 70%, which is consistent with the rating agency's criteria for a C rating. At the time, Moody's had said that the risk of a default, even after the debt exchange has been completed, remains high.

Fitch said the same thing:

Fitch Ratings has downgraded Greece's Long-term foreign and local currency Issuer Default Ratings to 'Restricted Default' from 'C' following today's confirmation from the Greek government and eurozone officials that the exchange of Greek government bonds will proceed. The downgrade reflects Fitch's previous commentary that the exchange would constitute a sovereign default event under the agency's distressed debt exchange rating criteria.

Earlier the ISDA said Greece was in default. The ISDA put out a FAQ on what happens next and seems to be implying an auction on Greek credit default swaps payouts:

Market participants conduct an auction through which the recovery value of Greek debt is determined. This recovery value determines the net payouts made under CDS contracts when a credit event occurs. The DC determined that an auction will be held in respect of outstanding Greek sovereign CDS transactions on March 19.

The ISDA is reporting $3.2 billion of credit default swaps are now triggered. Credit default swaps associated with Greek debt are around $70 billion.

According to the Depository Trust & Clearing Corporation’s CDS data warehouse, the total net exposure of market participants who have sold CDS credit protection on Greek sovereign debt is approximately $3.2bn as of March 2, 2012.

The net cash payout on CDS when a credit event occurs is the face amount of the CDS contract less the recovery value of the underlying obligations as determined at a CDS auction. For example, if the CDS auction showed the recovery value of debt to be (hypothetically) 25%, the aggregate amount payable would, in Greece’s case, be 75% of $3.2bn: $2.4bn.

Furthermore, statistics indicate that, on average, 70% of derivatives exposure is collateralized and the level of CDS collateralization is likely to be even higher as over 90% of CDS transactions (by numbers of trades) are collateralized.

Below is a CNBC clip in part discussing how sovereign debt and how the credit default swaps market is now threatened, which is our view, is a great news.



Believe this or not, it's not over for Greece. They are still in major debt with no economic growth in sight. The New York Times implies the IMF will soon be breathing down Grecian necks.

Greece, in essence, has become a financial ward of Europe. And, because the I.M.F. will probably be reluctant to put in new bailout money in the coming years, the burden will increasingly fall to Europe, led by Germany, to finance Greece. That will very likely happen directly, through country-to-country loans, and indirectly, through the euro zone’s rescue fund — the European Financial Stability Facility, to which most members of the euro currency union contribute.

As a rule, the I.M.F. does not accept haircuts and insists that its loans are always senior to all other obligations. European politicians, meantime, already under heavy criticism from voters for their countries’ increasing financial exposure to Greece, would have a difficult time explaining why they must take write-offs on some of their Greek debt because Athens still cannot balance its books.

This article is a follow up to an earlier post on Greece's bond swap and their potential to default. As expected, it finally happened. To see other articles on Greece, including details on their economy and debt, click this topic list.