Consequences Of The “SD” Rating For Greece By S&P

Posted by on Feb 27, 2012 in Uncategorized | No Comments

Probably none.

In a normal world, the ECB wouldn’t finance positions for banks that were rated D or SD.  But since the ECB is behind the whole deal and is doing everything for banks, any actual rule prohibiting that will be amended immediately if it hasn’t already been (there was a time the ECB would only fund investment grade assets).   So the ECB is likely to say things saying that they are not concerned and it will be business as usual for all of its operations and programs.

In a normal world, banks would have to write down their assets to market value by the end of the quarter.  Since by the end of the quarter, the PSI will be done for banks, or there will have been a default, it doesn’t change much.  It might make it harder for a bank to take only the 53.5% write-down (ie, mark the new bonds at par), but since it is only one agency and the regulators are supporting the deal, I don’t think it will affect bank earnings any more than the PSI/Default itself already was going to.

It has NOTHING to do with CDS.  The ISDA does not look to the rating agencies when declaring a Credit Event.  The fact that ISDA is being asked to see if the recent actions already constitute a Credit Event should not be affected.  In reality, it might give the committee more strength to determine that a Credit Event has occurred, but I suspect the case is too weak, and we will have to wait for the CAC’s to actually be used.

There might be some contracts out there that have “events of default” that would be triggered on this.  Maybe even some ISDA Master agreements.  It might impact some collateral provisions in the real world, but with the ECB and Politicians keen to push the deal through, I think banks would be reluctant to exercise their rights, so only on contracts that had Events of Default, outside of the banking system would be affected – and having only one rating agency go with Selective Default isn’t that likely to get picked up (I think most would be drafted with Default rather than Selected Default, if they had that sort of event at all).

If it wasn’t for the fact that the ECB, Politicians, and Regulators are all behind the deal, the S&P action might have a bigger actual impact, but since they are, I don’t think much of consequence will arise from this.  Though maybe, it will shake the faith in the “Grand Plan” or really make some people why the ECB’s balance sheet has been allowed to explode with lots of debt to weak countries?

I do look forward to seeing some funny (or at least hypocritical or ludicrous) statements coming out of some European talking heads tomorrow as they try to explain that Greece is nowhere near to default.  Under the “job creation” program, I could see them work harder to get the new European Credit Rating Agency they so desire off the ground.  Maybe they could base it in Athens, though having 3 people around to rubber stamp everything as AAA doesn’t sound like much of a job creation program.