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Standard & Poor's downgrades Greece to selective default

28 February 2012 / 15:02:07  GRReporter
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The credit rating agency Standard & Poor's downgraded Greece to selective default. Still in the summer of 2011, its experts had warned they would consider the Mediterranean country default if it triggered the PSI (Private Sector Involvement) procedure. The other two major agencies Moody's and Fitch are expected to do so in the coming hours too. Fitch has cut Greece's credit rating from CCC to C. The Greek government expects that all the three agencies will raise Greece's credit rating to CCC once the debt exchange is concluded, probably in the middle of March.
    The official release of the Greek Ministry of Finance states that Standard & Poor's decision has been expected and all its consequences have been foreseen in the decision of Eurogroup. It also states that the selective default will have no effect on the banking system of Greece, as the Bank of Greece and the European Financial Stability Facility have taken precautions for its liquidity. Following the announcement for the selective default, the European Central Bank has suspended the acceptance of Greek securities as collateral, i.e. as a guarantee of liquidity provision, reports Dow Jones.

    The Ministry of Finance optimism is not shared by banking circles in the country. They would lose over 75% in net present value from the exchange of bonds and they are waiting for the law on the financial stability fund in order to find out under what conditions they could benefit from it and whether it would mean nationalization of private banks. Only when they see the law, shareholders will decide whether they will benefit from the fund and whether they will be able to meet the mandatory involvement in the increase in banks’ capitalization. The mandatory involvement of private shareholders in the capitalization of banks is not specified in the memorandum with the Troika but it is expected to be around 10%. Streamlined concepts like "economic strength of shareholders" and "the desire of shareholders to invest new capital" lie in the memorandum.
    Greek bankers are warning that if a bold and decisive increase in the capitalization is required from shareholders and at a time, when world capital markets are unavailable this will lead to nationalization of the Greek banking system in the short term. According to them, the logical involvement of shareholders in the capitalization increase is 5 to 7%, noting at the same time the final percentage of shares the financial stability fund will purchase.

    In any case, the three directions the Greek financial institutions will take in the coming months are the long expected mergers, sales of property in order to provide liquidity and supervisory capital as well as a sharp reduction in operating costs. The aim of the Troika is to form a few, but healthy bank formations able to repay the state funds they will receive from the financial stability fund. In any event, it is preferable that they remain private not to further burden Greek taxpayers with their nationalization.
    The two banks that need an urgent solution are ATE Agricultural Bank and Post Bank. One of the plans is to divide ATE into a good and a bad bank and sell the good bank to one of the commercial banks. Another plan is to fully privatize Post Bank. Bank flirts that have been left off in recent months are expected to revive and foreign capital to be actively involved in the game.

    Both in and outside Greece, where the independence of bank subsidiaries allows it, these consequences mean closing branches because of overlapping networks, reducing staff, selling real estate and moving to smaller and more flexible forms of customer services. For example, the headquarters of two merged banks will have a common accounting department, human resources department and printing press.

    Voices in favour of the exit of Greece from the eurozone are growing among the global economic elite. This opinion is shared by the Nobel laureate Paul Krugman, who told before the University of Lisbon that Portugal is doing better than Greece and its economic situation is not as severe, but markets consider it the next threat, and therefore, exert pressure on it. He also underlined that Portugal is not going to collapse, but a long and painful adjustment is ahead of it. According to Krugman, Greece will leave the eurozone while Portugal has a chance to stay in it, but it is not quite sure.

Tags: Standard & Poor'sPSICredit ratingPaul KrugmanEurozoneSelective defaultEconomic crisisReformsBanking system
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