When Voluntary Is Mandatory

by Charles Forelle

Wall Street Journal
June 3, 2011

Standard & Poor’s has a note out this morning that attempts to etch some clarity onto the hazy terms “reprofiling” and “voluntary exchange.”

Those, of course, are what everyone is talking about as methods of handling Greece’s looming financing problem.

Specifically, S&P answers the salient question: Does it consider these things to be default?

Let’s walk through it.

“Reprofiling” entered the lexicon a few weeks ago. It is of unknown origin (Jean-Cladue Juncker, for one, denies paternity) but generally seems to mean extending debt maturities. That is, paying back money late.

S&P assumes it means “an extension of maturities in order to allay concerns regarding the encumbered short-term liquidity situation of the issuer.” In that case, says S&P, yep, it’s default.

“Voluntary exchange” is not so easy. Lots of habitual practices–open-market debt-buybacks, for instance–are a form of voluntary exchange. These are not default.

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