Greek Bond Yield Hit 750%, Debt Exchange Equals Default (Fitch)

On 2/22/2012, Fitch Ratings downgraded Greece to 'C' from 'CCC' and said the planned "distressed debt exchange" between the Greek government and private sector bond holders (PSI or 'private sector involvement'), who will take a 53.5% nominal loss on the bonds, would "constitute a rating default". See the full text after the jump. Greece's 1-year government bond yield closed at 750% on 2/22 and its 5Y credit default swap spread closed at 12,700 basis points. Look at the 3-year charts below, courtesy of Remember when Greece's 10-year bond yield was at 6.85% on January 31, 2010? It is now at 34.36%. And on that day Greece's 5Y CDS was trading at 399 basis points (linked to a Zero Hedge chart)! Now the question is whether Greek CDS holders get paid out or not. Is Portugal next?

Greek bailout deal fails to dent CDS spreads (
Greek debt swap pay-out prospect weighed (
Markets Expected To Weather Likely Greek CDS Trigger -Analysts (Dow Jones)
One Last Greek CDS Post Before It All Goes Poof (DealBreaker)
Don't Fear the Greek CDS (Forbes).

Greek 1-year Government Bond Yield (

Greece 5-year Credit Default Swap Spread (

Fitch Downgrades Greece to 'C' from 'CCC'
22 Feb 2012 6:33 AM (EST)

Fitch Ratings-London-22 February 2012: Fitch Ratings has downgraded Greece's Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'C' from 'CCC'. The Short-term foreign currency rating is affirmed at 'C'. The agency has also affirmed the euro area Country Ceiling at 'AAA', which is applicable to all euro area member states.

The downgrade follows yesterday's Eurogroup statement on a second financing programme for Greece including 'private sector involvement' (PSI) and a subsequent announcement from the Greek authorities outlining the terms of the proposed exchange of Greek Government Bonds (GGBs). The rating action is in line with Fitch's statement on 6 June 2011, which outlined its rating approach to a sovereign debt exchange (see 'Fitch Outlines Rating Approach to a Sovereign Debt Exchange').

The Eurogroup communique acknowledges that a common understanding has been reached between the Greek authorities and the private sector on the general terms of a 'private sector involvement' (PSI) exchange offer, including a nominal haircut of 53.5% to the face value of GGBs. The subsequent statement from the Greek authorities expands on the terms of the debt exchange and confirms the Greek government's intention to introduce collective action clauses (CACs) into those GGBs governed by Greek law.

In Fitch's opinion, the exchange, if completed, would constitute a 'distressed debt exchange' (DDE) in line with its criteria and consequently yesterday's announcements set in motion the agency's process for reviewing Greece's issuer and debt securities ratings. The sovereign IDR has accordingly been lowered to 'C' from 'CCC' indicating that default is highly likely in the near term. The ratings of the securities subject to the exchange have also been lowered to 'C' from 'CCC'.

Fitch considers that the proposal to reduce Greece's public debt burden via a debt exchange with private creditors will, if completed, constitute a rating default, and result in the country's IDR being lowered to 'Restricted Default' ('RD') upon completion. The ratings of GGBs affected by the exchange, including those not tendered but restructured under CACs, which are expected to be imposed retrospectively on bonds issued under Greek law, will also be lowered to 'D' ('default') at this time.

Shortly after completion of the exchange with the issue of new securities, Greece's sovereign rating will be moved out of the 'RD' category and re-rated at a level consistent with the agency's assessment of its post-default structure and credit profile.

Fitch regards the imposition of retrospective CACs as a material adverse change in the terms and conditions of GGBs in the context of an imminent debt exchange and confirms its assessment that the exchange will be distressed and de facto coercive on private holders of Greek bonds. Nonetheless, the primary credit event is the exchange itself and Fitch will rate Greece and its securities accordingly.