Fitch just cut the long-term credit rating for Greece from B- to CCC.
GREXIT: Fitch says rating cut reflects risk Greece may not last as member of euro-area
BIG CALL FROM FITCH: Explicitly raising Greek exit odds. All other sovereigns face ratings risk if Greece leaves
The ratings agency says the downgrade comes on fear that Greece won’t be able to stay in the eurozone:
The downgrade of Greece’s sovereign ratings reflects the heightened risk that Greece may not be able to sustain its membership of Economic and Monetary Union (EMU).
It says this action comes in the wake of the May 6 elections, which was dominated by strong support for anti-bailout parties.
Fitch had upgraded Greece just two months ago, after the country participated in a managed default.
The ratings agency said an exit from the euro was “probable” if politicians fail to form a government after the next round of elections on June 17. It hinted that this could also compromise the ratings of other troubled euro area sovereigns:
A Greek exit from EMU would break a fundamental tenet underpinning Fitch’s sovereign and other ratings in the eurozone as well as exacerbating economic and financial risks facing other EAMS.
We’ll probably get more big ratings news later today, as it appears probable that a rumor about an imminent downgrade of as many as 21 Spanish banks will be validated.
Here’s the full release:
Link to Fitch Ratings’ Report: Fitch Takes Negative Rating Actions on Greece
Fitch Ratings-London-17 May 2012: Fitch Ratings has downgraded Greece’s Long-term foreign and local currency Issuer Default Ratings (IDRs) to ‘CCC’ from ‘B-’. The Short-term foreign currency IDR has also been downgraded to ‘C’ from ‘B’. At the same time, the agency has revised the Country Ceiling to ‘B-’.
The downgrade of Greece’s sovereign ratings reflects the heightened risk that Greece may not be able to sustain its membership of Economic and Monetary Union (EMU). The strong showing of ‘anti-austerity’ parties in the 6 May parliamentary elections and subsequent failure to form a government underscores the lack of public and political support for the EU-IMF EUR173bn programme.
In the event that the new general elections scheduled for 17 June fail to produce a government with a mandate to continue with the EU-IMF programme of fiscal austerity and structural reform, an exit of Greece from EMU would be probable. A Greek exit would likely result in widespread default on private sector as well as sovereign euro-denominated obligations, despite a moderate sovereign debt service burden following the restructuring of Greek government bonds in March.
Fitch previously assigned a single ‘AAA’ Country Ceiling across all Euro Area Member States (EAMS) reflecting the very low risk of transfer and convertibility controls being imposed within EMU and on euro-denominated debt. With exit from EMU a material and rising risk, Fitch has revised the Country Ceiling to ‘B-’ for Greece, which effectively imposes a cap on the ratings of all issuers and transactions domiciled in Greece. In the event of a Greek exit from EMU, Fitch would treat the forcible re-denomination of sovereign and private sector debt into a new Greek currency as a default event in line with its Distressed Debt Exchange rating criteria.
As Fitch previously commented (see ‘Re-Run Elections Would Be Critical for Greece, Eurozone’, dated 11 May 2012 at www.fitchratings.com), a Greek exit from EMU would break a fundamental tenet underpinning Fitch’s sovereign and other ratings in the eurozone as well as exacerbating economic and financial risks facing other EAMS. Consequently, Fitch would place all eurozone sovereign ratings on Rating Watch Negative (RWN) following the Greek elections if Fitch assesses that the risk of a Greek exit from EMU is probable in the near term.
As a result of the revision of the Country Ceiling, 32 structured finance (SF) notes that were rated above ‘B-sf’ have been downgraded. All Greek structured finance ratings are now capped by the Country Ceiling. This means that many tranches have the same ‘B-sf’ rating despite the different characteristics of their structures and collateral portfolios. Fitch will comment on the relative strengths and weaknesses of these tranches based on the performance of the underlying portfolios.
The SF tranches that were previously on RWN have been maintained on RWN as a result of the uncertainty surrounding the political situation in Greece. Fitch expects to downgrade these notes further in the event that an exit of Greece from EMU becomes probable, as discussed above. Additionally, the ratings of two tranches that are credit-linked to the sovereign’s Long-term IDR have been downgraded.