Wall Street Journal
July 22, 2011
Q: Thursday's deal by euro-zone leaders means Greece is likely to be declared in "selective default" by credit-rating firms. What does this mean?
A: It's a technical assessment that means investors in some Greek bonds will be worse off as a result of the deal. It implies holders of other bonds are still being repaid in full and on time.
Q: How significant is it?
A: Most selective default ratings last only a short time. Euro-zone leaders are hoping the deal, which reduces Greece's debt burden and provides more official loans, will convince credit raters that chances of full repayment on remaining debt are improved.
Q: But euro-zone leaders spent months fighting selective default, worrying investors might fear other countries could go down the same default path. Isn't that still a concern?
A: That depends on financial markets. Euro-zone leaders have done what they can to paint Greece as a special case—indeed, its debt is by far the highest as a proportion of annual economic output of any euro-zone country—and to emphasize that other governments will pay their debts in full and on time. They have also provided the euro-zone bailout funds with new tools aimed at preventing others from sliding into debt difficulties.
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