Standard and Poor’s downgraded Greece’s credit rating on Friday to B-, just one notch above the range indicating vulnerability to a default, warning Athens had limited time to reach a deal on its massive debts with creditors.
“In our view, a prolongation of talks with official creditors could also lead to further pressure on financial stability in the form of deposit withdrawals,” the ratings agency said, adding that “in a worst-case scenario”, it could lead to “the imposition of capital controls and a loss of access to lender-of-last-resort financing, potentially resulting in Greece’s exclusion” from the eurozone.
The downgrade came the same week members of Greece’s hard-left government toured European capitals to win support for Athens’ demand that terms of the country’s 240-billion-euro ($275-billion) EU-IMF bailout be eased.
Not only did those appeals fall on largely deaf ears in its eurozone partners, however, but on Wednesday the European Central Bank moved to restrict Greek lenders’ access to a key source of cash by rescinding the right of Greek banks to use government debt as collateral for loans.
The result was the creation of an atmosphere of a stand-off in which creditors and eurozone partners were holding Greece to the strict terms of the bailout, even as Athens repeated its determination to renegotiate the nation’s debt commitments.
With a February 28 deadline looming on Greece’s current bailout arrangement looming, the increasingly tense game of financial chicken between cash-starved Athens and its international creditors figured heavily in S&P’s downgrade decision.
“The downgrade reflects our view that the liquidity constraints weighing on Greece’s banks and its economy have narrowed the timeframe during which the new government can reach an agreement on a financing programme with its official creditor,” the S&P statement said — adding its rating of Greek bonds could be nudged up amid evidence Athens had worked out a viable agreement with creditors to end the stand-off.
“Conversely, we could lower our ratings on Greece if we perceive that the likelihood of a distressed exchange of Greece’s commercial debt has increased further because official funding has been curtailed, government borrowing requirements have deteriorated beyond our expectations, or Greece’s external financing has come under greater stress,” it also noted.