Greece Downgraded Again by S&P, Default Looming

Greece’s credit rating was downgraded yet again by Standard & Poor’s (S&P), this time to CC from CCC.

S&P stated that it views the EU’s debt restructuring proposal as a “distressed debt exchange,” and amounts to a “selective default.”

The ratings agency went on to say that the debt exchange and rollover options are unfavorable to investors and a recovery rate of 30-50% is expected from bondholders.

S&P also issued a negative outlook, indicating an increased likelihood of a further downgrade to Greece.

While prior downgrades have deservedly received considerable attention, today’s is not as significant.  Following the European summit on Greece two weeks ago, euro zone officials expected the ratings agencies to determine that their latest proposal constituted a “selective” Greek default.  However, by agreeing to additional measures in the hopes of preventing the contagion from spreading beyond Greece, policymakers were able to appease the markets, at least temporarily.  This was illustrated by the rally over the past two weeks in the euro currency, which climbed from 1.38 to 1.45 against the U.S. dollar.

Although the euro tumbled back toward 1.4330 against the dollar this morning, it remains well north of crisis levels – particularly compared to last summer, when it hit a multi-year low near 1.19 against the greenback.