Q&A: Greek rollover and rating agencies

Financial Times
July 5, 2011

So, has Greece defaulted?

No. But Standard & Poor’s, the rating agency, has said it would do so if the German and French banks’ plan to roll over Greek debt went ahead. In that case, Greece would be rated as SD, “selective default”. Its current rating is CCC, the lowest rating in the world.

Aren’t these the same rating agencies that were discredited by the financial crisis?

Indeed. The agencies’ reputations were damaged because of their persistently positive ratings of mortgage-backed securities and credit derivatives before the financial crisis. However, S&P, Moody’s and Fitch – the big three – argue that their sovereign credit ratings are far more dependable. Even the International Monetary Fund tends to agree – it noted recently that in the past 35 years every country that defaulted was rated below investment grade for a year beforehand. S&P downgraded Greece to that level in April 2010.

So does S&P’s warning of a possible Greek default matter?

Symbolically, it absolutely does. Were Greece to default, it would be the first developed country to do so since the end of the second world war. But beyond the symbolism, the significance of a selective default rating is harder to judge. S&P itself says it would rate Greece as SD only for “a short time”; how long that would be is hard to say right now. Previously, countries have remained on SD for anywhere between a day and six months.

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