Greece, Default and a Hung Jury

by Brian Blackstone

Wall Street Journal
July 5, 2011

If the major rating agencies all declare bank rollover plans for Greece to be a default, the European Central Bank would almost certainly refuse Greek debt as collateral for its lending operations. That much has been made clear.

But Standard & Poor’s warning that it would likely classify the French rollover plan for Greece as a default raises a scenario straight out of a John Grisham novel: what if there’s a hung jury?

If the ECB strictly applies its longstanding collateral rules, then a default determination would have to be made by all the major rating agencies. The central bank uses the best rating among the major rating agencies to determine whether a debt instrument meets its minimum rules. (This is referred to as the “first best” principle.”)

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