July 4, 2011
Europe’s effort to pull Greece back from the brink may result in a default rating by Standard & Poor’s, exposing a critical flaw in the drive to press creditors to assume a share of the bailout cost.
Standard & Poor’s said today a rollover plan serving as the basis for talks between investors and governments would qualify as a distressed exchange and prompt a “selective default” grade. That may leave the bondholders unwilling to complete the transaction and the European Central Bank unable to accept Greek government debt as collateral, impairing the lifeline it has provided the country’s banks.
“It sends all the officials and banks back to the drawing board to think of something new,” said Christoph Rieger, head of fixed-income strategy at Commerzbank AG in Frankfurt. “The ECB is saying it won’t accept debt in a default. Someone needs to give in -- either Germany or the ratings agencies or the ECB. One of three will have to compromise.”
The S&P statement came less than 48 hours after euro-area finance ministers authorized an 8.7 billion-euro ($12.6 billion) loan payout to Greece by mid-July and said they would aim to complete talks with banks on maintaining their Greek debt holdings within weeks. The International Monetary Fund indicated it would deliver its 3.3 billion-euro share of the payment.
The prospect of a default rating adds to policy makers’ concerns that Greek officials may fail to enact the 78 billion euros of austerity measures that lawmakers passed last week as a condition of receiving further aid.
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