A rollover of Greek sovereign debt, which has been discussed as part of a new Greek bailout package, or a restructuring would probably trigger a downgrade of Greek covered bonds, said Fitch yesterday (Tuesday), meaning that these would likely end up as sub-investment grade.

“Further adverse rating action on the Greek sovereign will affect covered bonds to the extent that the Issuer Default Ratings (IDR) of the respective Greek banks are affected,” wrote Fitch.

“Increased sovereign default risk raises the prospect of severe economic and operational stress scenarios occurring in a country, reducing the certainty of performance projections for related securitisations.”

If Greece’s IDR were downgraded to C, then the IDRs of the five major banks – which are on Rating Watch Negative (RWN) would likely be downgraded from a B to C range. Greek covered bonds are rated BBB by Fitch and on RWN.

“Fitch determines the achievable rating uplift from an issuer’s IDR based on an assessment of the likelihood of payment continuity on the bonds immediately following an assumed issuer event of default,” added Fitch. “The extent of the uplift above each issuing bank’s IDR would continue to reflect the level of recoveries expected from the cover pool assuming a default of the covered bonds.

“In addition, for bonds incorporating a 10 year maturity extension the rating would continue to incorporate a differential in the probability of default of the instrument compared to that of the issuer. Both sources of rating uplift are subject to the committed level of overcollateralisation being commensurate with the respective stress scenario.”

Moody’s downgraded five Greek covered bond programmes to junk status on 3 June, leaving them at Ba3.

If Fitch downgrades the Greek programmes to sub-investment grade then the programmes would no longer meet the minimum criteria of the European Central Bank for liquidity operations, since at least one rating must be investment grade in order to achieve ECB eligibility. However, some market participants have suggested that the ECB would change its criteria to allow Greek banks continued access to central bank funding.

While covered bonds would face a downgrade from Fitch, structured finance securities would not necessarily face further rating actions. Fitch believes the financial payment system in Greece would continue to operate sufficiently for cashflows in securitisations and payments would continue on schedule, even in the event of restructuring or default.

All structured finance ratings, along with all covered bond programmes, remain on RWN, however, as restructuring would likely be followed by a period of intense uncertainty in Greece.