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Greece will partially default on its debt once European officials push through a plan that will see bondholders foot part of the bill of a second bailout agreed to last week in Brussels, Standard & Poor’s said.
The rating company also cut its ranking for Greece to CC, two steps above default, from CCC, according to a statement published in London Wednesday. The outlook on the debt is negative, according to Bloomberg report.
“The proposed restructuring of Greek government debt would amount to a selective default under our rating methodology,” S&P said. “We view the proposed restructuring as a ‘distressed exchange’ because, based on public statements by European policymakers, it is likely to result in losses for commercial creditors.”
EU leaders agreed last week that bondholders will contribute 50 billion euros ($72 billion) to a new rescue package, with euro-region governments and the International Monetary Fund putting up a further 109 billion euros.
The cost of insuring against a default by Greece was at 1,695 basis points Wednesday, implying a 76 percent chance the government will fail to pay its debts within five years. The price of the contracts soared to a record 2,568 basis points on July 18, when the probability of default approached 90 percent, according to CMA.
“There hasn’t been a big shock to the market as it’s mostly water under the bridge,” said David Keeble, head of fixed income strategy at Credit Agricole Corporate & Investment Bank in New York. “I think the market is prepared for the next step, which is selective default and which should happen in a month or so. It will be interesting to see what rating Greece will be assigned after the SD phase.”