Efforts to rescue Greece hit a new roadblock after Standard & Poor’s declared that a French plan to involve the private sector would constitute a default by Athens.
S&P said that proposals from the Fédération Bancaire Française to participate in a rollover of Greek debt would lead to a downgrade in its rating on Greece’s public debt to “Selective Default”. If the policy is echoed by the other rating agencies, it could prompt the European Central Bank to refuse to accept Greek government debt as collateral. That would theoretically cut off the lifeline the ECB has been providing to the country’s stricken banking system.
The threat of a downgrade sent a fresh ripple of concern through financial markets as some analysts warned that negotiators would have to go “back to the drawing board” as they try to seal a deal involving the private sector in the latest Greek rescue.
It will also heighten tensions between rating agencies and EU governments amid concern about their influential position and the market volatility caused by their decisions. Klaus Baader, of Société Générale, said that S&P’s decision would drive relations between the agencies and some euro area states “to breaking point ... I find it increasingly difficult to rationally understand the rating agencies’ moves.”
European ministers were already struggling to reach a deal on a debt rollover last weekend, although they agreed to release their share of the latest €12 billion tranche of rescue aid for the country. The French plan is for banks and other private sector holders of Greek debt to roll over €30 billion of bonds, reducing the amount of financing that would have to be provided by the governments and the IMF. Germany’s banks have also said they are willing to participate in a rescue, and its Finance Ministry has been negotiating its own version of the French scheme.
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Greece is estimated to need €120 billion of new funding to last until 2014. Even if the rollover is finally agreed, analysts have cautioned that it will only give Athens breathing space.
The two versions of the French plan were founded on the presumption that they would not trigger a default. But in a note discussing them S&P said: “We believe that both options represent [i] a ‘similar restructuring’ [ii] are ‘distressed’ and [iii] offer ‘less value than the promise of the original securities’ under our criteria.
“If either option were implemented in its current form, absent other mitigating information, we would likely view it as constituting a default.”
Fitch Ratings has said that “if it looks like a default, we will rate it as a default”, but it has not formally adjudicated on the French scheme.
Yesterday’s pronouncement means the ECB may come under government pressure to alter its approach to collateral by accepting bonds even if they have been declared to be in default by the rating agencies.
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However, some officials argued that the S&P decision was only a temporary setback to plans for a rollover. Bankers in Greece said that if the period of the “selective default” was brief, it would not undermine their financing arrangements with the ECB.
The bigger worry is whether a rollover deal would trigger credit-default swaps, a type of insurance against a government debt default. This would probably send shockwaves through the financial system because of the difficulties in predicting the exposures of different financial institutions to the contracts.