Greek debt, cut to CCC, is going, going ...

From The Economic Spy

Greek bonds are cut three notches to CCC by S&P - Given the value of rating agencies is this move significant?

The value of bond ratings, as in the case of Greek bonds, can be questionable!

For those reading this article who don't have a background in bonds and who most likely don't know or don't care about bond ratings, this is a quick tutorial on the scale used by Standard & Poor's, better known as S&P.

First, however, I would like to provide a quick summary on the value of ratings in light of the Greek bond downgrade to CCC.

As an indicator, many of the mortgage-backed securities that imploded around the world were rated AAA by S&P.

Never mind Greek bonds, why would a rating agency allow junk to masquerade as gold?

The conflict of interest inherent in ratings are obvious when you look at the fact that the issuers of a bond getting rated, paid for the rating.

If the rating agencies like S&P, Moody's and Fitch want to keep those issuers coming back, they will sometimes be a little flexible in terms of where an issue is rated.

The initial rating of the bond is also only the first step. It is the job of the rating agency to monitor the health of the issuer and warn the market if any change in quality is projected due to some change in an issuers fortunes.

For large issues like Greek bonds there will be more oversight versus a small-town municipal issue that is one and done in the marketplace.

With these small issuers the only time the credit quality is looked at is at the time the bond is initially underwritten.

The rating agencies will almost exclusively be reactive as opposed to proactive and therefore investors are not warned and are left holding a very expensive bag when an issuer gets into financial trouble.

Only once the light of day is shone on their failings do the rating agencies try and react proactively to deteriorating fiscal fortunes. But by then, sadly, it is often too late.

The S&P rating scale will give a good indication of the future prospects for Greek bonds and possibly for the EU itself.

That is if the ratings are too be believed! The credit outlook for Greek bonds at CCC is extremely vulnerable.

‘AAA’—Extremely strong capacity to meet financial commitments. Highest Rating.

‘AA’—Very strong capacity to meet financial commitments.

‘A’—Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances.

‘BBB’—Adequate capacity to meet financial commitments, but more subject to adverse economic conditions.

‘BBB-‘—Considered lowest investment grade by market participants.

‘BB+’—Considered highest speculative grade by market participants.

‘BB’—Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions.

‘B’—More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments.

‘CCC’—Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.

‘D’—Payment default on financial commitments.

Greek bonds are definitely not for the faint of heart!