The Ratings Agencies Are Displeased

by Matt Phillips

Wall Street Journal
July 5, 2011

As the Troika — the European Union, IMF and European Central Bank — are trying to tip-toe their way through the financial minefield that is the Greek debt crisis, the key ratings agencies seem to be cutting off several paths that look least likely to lead to unexpected explosions.

Moody’s Investors Service said Tuesday that banks rolling over some of their Greek debt into new instruments may have to take impairment charges. Rival agency Standard & Poor’s Corp. on Monday rocked plans to involve the private sector in giving Greece more time to work out its fiscal problems by saying a proposal being promoted by French banks would likely put the country in “selective default.”

While it may seem like an argument over semantics to casual observers — especially with Greek two year debt yielding 25.7%! — having ”default” stamped on Greek debt would be a big deal. The European Central bank had been saying that it wouldn’t accept such “default” debt as collateral in exchange for the cash it lends. Greek banks rely on that cash to keep operating. If they were cut off from the ECB because they couldn’t post Greek collateral, the thinking is that it could potentially cause the collapse of the Greek banking system, worsening the potential for a chaotic and messy contagion among European banks.

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