COMMENTARY Standard & Poor's on Tuesday cut Greece's credit rating from "you've got to be kidding" to a full-fledged "selective default." So why hasn't the world melted down?
It may come as no surprise that the ratings agencies' opinions are irrelevant on this matter. The firms are generally considered so far behind the curve in assessing countries' creditworthiness that they are about to be lapped by Secretariat. Anyone who thinks Greece hasn't already defaulted on its debt -- officially or not -- should seek professional help immediately.
Besides, S&P only offered its latest take on Greece under duress. The agency said it would find the country in default if it added "collective-action" clauses to its sovereign debt. This move, taken by Greece's parliament last week, effectively forces all bondholders to exchange their current holdings for new bonds -- investments that will take a lot longer to pay back (say, 30 years) a lot less (as much as 70 percent less).
Typically, a nation defaults on a loan the same way anyone else does. If you don't make your payments in full and on time, you're in default. What's different about sovereign debt is that the issuer (in this case Greece) can pass laws that change the terms of the debt. That means a country can also go into default if the bondholder refuses to accept the debt issuer's proposed changes.
Why does this matter? Because of credit default swaps, those little insurance policies that almost brought down the U.S. financial system during the housing bust. If a change in debt terms is deemed to be involuntary, then CDS holders can collect on the insurance they bought against the debt. The International Swaps and Derivatives Association, a trade group that oversees (OK, ignores) the over-the-counter swaps business, that gets to say when a default is a default. Tomorrow, the ISDA is supposed to decide whether or not it will decide if altering debt terms constitutes default. Don't you love bureaucracy?
To provide more time for negotiations, European officials (and just about everyone else) have wiggled around the issue of whether Greece is technically in default, saying that a "credit event" hasn't taken place. With the country already having, it will be interesting to see if the next verdict on Greece's solvency is one of expedience or one that follows the law.