Greek banks could survive short-lived selective default

Reuters
July 4, 2011

Greek banks would not be wrecked by a "selective default" on a proposed debt rollover if it was lifted quickly, Greek bankers told Reuters on Monday.

But if ratings agencies left Greek in default territory for some time, an arrangement would need to be made with the European Central Bank to ensure that funding does not dry up, the bankers said, with one adding that such talks had already started.

Rating agency Standard & Poor's warned on Monday that rollover proposals being touted for Greek debt would amount to a "selective default," a move that tempers hopes for a resolution to the protracted and damaging crisis.

Greek banks depend on the ECB for liquidity as they have long been shut out of wholesale funding markets remains on sovereign debt default fears. If their collateral, mainly government bonds, becomes unacceptable as a result of a default downgrade, the central bank may have to turn off the liquidity taps.

"If the 'selective default' period is short, covering just the settlement period for the bond exchange to take place, then there would be no funding issue for Greek banks," a senior Greek banker, who declined to be named, told Reuters.

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