July 4, 2011
Over the past week or so, European leaders have put together the beginnings of a framework for a plan to keep Greece afloat for a while longer. It appears that as part of a second Greek bail-out package, European banks might be willing to voluntarily rollover most of the proceeds of maturing Greek debt into new Greek government bonds. As a piece in this week's Economist makes clear, this would probably be a much better deal for banks than for Greece. What it might also be, according to Standard & Poor's, is a default:
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 exchange and the European Central Bank unable to accept Greek government debt as collateral, impairing the lifeline it has provided the country’s banks.
The biggest problem with a default—indeed, the main reason explicit bondholder haircuts aren't on the table—is the second reason given above: in the event of a default, the European Central Bank may no longer accept Greek government debt as collateral. The ECB would not be "unable" to do so, as S&P has it. It has simply threatened that it won't. So while the headlines all say that S&P is throwing a wrench in the latest plans, the real difficulty begins with the ECB.
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