Greece CDS now at all time wides. Last quote was over 800 bps.
Below is S&P’s press release on today’s downgrade.
Overview
We have updated our assessment of the political, economic, and budgetary challenges that the Greek government faces in its efforts to place Greece’s public debt burden onto a sustained downward trajectory. We are lowering our ratings on Greece to ‘BB+/B’ from ‘BBB+/A-2′ and assigning a negative outlook.The negative outlook reflects the possibility of a further downgrade if the Greek government’s ability to implement its fiscal and structural reform program materially weakens in our view, undermined by domestic political opposition at home or by even weaker economic conditions than we currently assume.
Rating Action On April 27, 2010, Standard & Poor’s Ratings Services lowered its long- and short-term sovereign credit ratings on the Hellenic Republic (Greece) to ‘BB+’ and ‘B’, respectively, from ‘BBB+’ and ‘A-2′. The outlook is negative. At the same time, we assigned a recovery rating of ’4′ to Greece’s debt issues, indicating our expectation of “average” (30%-50%) recovery for debtholders in the event of a debt restructuring or payment default. The ‘AAA’ transfer and convertibility assessment is unchanged.
Rationale – The downgrade results from Standard & Poor’s updated assessment of the political, economic, and budgetary challenges that the Greek government faces in its efforts to put the public debt burden onto a sustained downward trajectory. We believe that the government’s policy options are narrowing because of Greece’s weakening economic growth prospects, at a time when pressures for stronger fiscal adjustment measures are rising. Moreover, in our view, medium-term financing risks related to the government’s high debt burden are growing, despite the government’s already sizable fiscal consolidation plans. Our updated assumptions about Greece’s economic and fiscal prospects lead us to conclude that the sovereign’s creditworthiness is no longer compatible with an investment-grade rating.
As a result of Greece’s rising commercial borrowing costs, the authorities have requested extraordinary support from the Eurozone and the International Monetary Fund (IMF). We anticipate further information in the coming weeks from EU members regarding the terms and duration of support for Greece. We believe that a multiyear European Economic & Monetary Union (EMU)/IMF support program is likely, which should, in our opinion, significantly ease Greece’s near-term liquidity challenges. Nevertheless, in our view, pressures for more aggressive and wide-ranging fiscal retrenchment are growing, in part because of recent increases in market interest rates. In our revised projections, we forecast Greece’s net general government debt-to-GDP ratio reaching 124% of GDP in 2010 and 131% of GDP in 2011.
We continue to believe that the size and scope of the Greek government’s fiscal consolidation program, and the government’s political will to implement it, are the main drivers of our sovereign ratings on Greece. Sustained success in this regard could, in time, be reflected in lower market interest rates on Greece’s debt. Early indications show that the government is likely to meet its 2010 deficit target. The authorities are also moving ahead with their structural reform agenda, adopting tax reform in April, while proposals on pension reform are expected in May.
Nevertheless, we believe that the dynamics of this confidence crisis have raised uncertainties about both the government’s administrative capacity to implement reforms quickly and its political resolve to embrace a fiscal austerity program of many years’ duration. Based on our updated assessment, we estimate that the adjustment needed in Greece’s primary fiscal balance relative to that of 2008 in order to stabilize the government debt burden amounts to at least 13% of GDP–a very high level compared with that which other sovereigns have been able to achieve. The government’s resolve is likely, in our opinion, to be tested repeatedly by trade unions and other powerful domestic constituencies that will be adversely affected by the government’s policies. At the same time, we expect official lender support to be highly conditional and revocable, and as such, we do not believe that it provides a floor under Greece’s sovereign ratings.
As previously noted, the government’s multiyear fiscal consolidation program is likely to be tightened further under the new EMU/IMF agreement. This, in our view, is likely to further depress Greece’s medium-term economic growth prospects. Under our revised assumptions (see below), we expect real GDP to be nearly flat over 2009-2016, while the level of nominal GDP may not regain the
2008 level until 2017. Moreover, we find that Greece’s fiscal challenges are increasing pressures on the banking and corporate sectors. In particular, we see continuing fiscal risks from contingent liabilities in the banking sector, which could in our view total at least 5%-6% of GDP in 2010-2011.
Greek Government Economic Scenarios And Standard & Poor’s Updated Baseline Scenario
Average 2010-2013 Greek SGP 1 Greek SGP 2 S&P baseline
Real GDP growth (% yoy) 1.4 0.9 (0.8)
Nominal GDP growth (% yoy) 3.4 2.7 0.0
General gov’t. deficit (% GDP) 4.8 4.8 5.8
CA deficit (% GDP), 2013 6.0 6.4 0.0
Gov’t. debt/GDP (%), 2013 113 113 137
SGP–Stability and Growth Program (January 2010). Greek SGP 1–Greek government’s base case. Greek SGP 2–Greek government’s alternate scenario.
yoy–Year on year. CA–Current account.
Together with the lowering of our ratings on Greece to ‘BB+/B’, we have also assigned a recovery rating of ’4′ to Greece’s debt. This is in keeping with our policy to provide our estimates of likely recovery of principle in the event of debt restructuring or a debt default for issuers with a speculative-grade rating. A recovery rating of ’4′ reflects our current expectation of “average” (30%-50%) recovery for holders of Greek government debt.
Outlook
The negative outlook reflects the possibility of a further downgrade if, in our view, the Greek government’s ability to implement its fiscal and structural reform program is undermined by domestic political opposition or materially weakens for other reasons, including even weaker economic conditions than we currently assume.
We could revise the outlook to stable if we perceive that political support for government economic policies remains robust and Greece’s economic growth prospects prove to be more benign than we currently anticipate.
Posted by Rom on under 
Bond Market Recap – April 27, 2010
by Rom Badilla, CFA – Bond Trader and BondSquawker
The U.S. Treasury market roared on heavy volume as yields across the curve declined due to heightened sovereign risk in Europe. Greek and Portuguese bond yields jumped as investors expressed concern that Greece will need to restructure its debt and that Portugal will be the next debt-heavy domino to fall.
S&P cut the credit rating of both Greece and Portugal earlier today, which compounded the problem. The credit rating agency cut Greece’s long and short term credit rating to junk, which is below investment grade to BB+ and B, respectively. Also, S&P lowered Portugal’s long-term local and foreign currency ratings by two notches to A- from A+ with outlook negative.
2-Year Greek Bonds closed the day at 15.26, a jump of 220 basis points. The 5-Year yield is higher by 90 basis points to 11.65 percent while the 10-Year managed to close at 9.67 percent, an increase of 13 basis points.
Greek Yield Curve - Daily Change
2-Year Portugal government bond yields are trading at 4.79 percent, an increase of 83 basis points while the 5-year is higher by 61 basis points to 5.35 percent. The 10-Year is at 5.67 percent, a move higher of 48 basis points.
Portugal Yield Curve - Daily Change
Due to increasing sovereign risk, U.S. Treasuries rallied in a flight-to-quality bid as yields declined across the maturity spectrum. The yield on the 2-Year closed the session at 0.95 percent, a decline of 10 basis points. The belly of the curve outperformed the most by dropping 14 basis points to 2.42 percent. The longer-end followed suit by declining 9-12 basis points as the 10-Year and Long Bond ended at 3.69 and 4.58 percent, respectively.
10-Year Treasury Yield - Intraday Chart
The Merrill Lunch MOVE Index, which measures Option Volatility across the Treasury curve surged to 88.90, a 7.1 percent increase. The spike in volatility, which in turn increases the price to own options, can be interpreted as a shift in investor sentiment or of future uncertainty.
The news across the Atlantic overshadowed the events in the U.S. as current and former Goldman Sachs employees including CEO Lloyd Blankfein testified in a Senate Hearing about their mortgage-related business. The Securities Exchange Commission alleges that Goldman Sachs misled investors by failing to disclose key facts about a financial product tied to sub-prime mortgages as the U.S. housing market was beginning to falter.
Despite the fact that Goldman Sachs was the lone member in the financial equity sector to post gains, their credit spread was higher. 5-Year Goldman Sachs CDS jumped 6 basis points to a credit spread of 173 basis points.
The S&P 500 declined 2.3 percent to 1183.71. The Volatility Index aka VIX spiked massively by 30.6 percent or a change of 5.34 to 22.81.
The Dollar Index, which is a measure of value against the six major world currencies, advanced by 1.1 percent to end the day at 82.396. The Euro dropped 1.6 percent to 1.3175, its lowest level since early 2009.