The FINANCIAL — Proposals for a payment holiday under a new rescue can trigger partial default, rating agency S&P fired a warning shot over Greek debt on Monday.
S&P, which has already lowered the long-term rating on Greek public debt to "CCC" from "B", warned that a proposal floated by the French Bank Federation risked putting Greece into a selective default.
"It is our view that each of the two financing options described in the FBF proposal would likely amount to a default under our criteria," a statement said.
According to the EU Business web-site, On Saturday, eurozone finance ministers approved the next 12-billion-euro slice of last year's 110-billion-euro ($160-billion) European Union and International Monetary Fund bailout for Greece after the Greek parliament passed fresh austerity measures.
But talks over a second rescue package of about the same amount could be tougher because some governments, notably in Germany, insist that private investors share the burden by agreeing to "roll over" their Greek debt.
There is widespread concern that if the terms of a new rescue are judged to be equivalent to a default, dangerous repercussions could upset the eurozone and global financial markets.
The European Central Bank has warned that what it terms a "credit event", referring to discriminatory treatment between holders of Greek debt, could lead it to end its own lifeline support for the Greek banking system.
The ECB has supported Greece by buying large amounts of its debt on the market, but has said it will not participate in any rollover.
There is also concern that a default situation could trigger strains in the market for credit default swaps, which act as insurance against default.
A domino effect could severely weaken the balance sheets of some banks and insurance companies, it is feared.
French banks hold a sizeable proportion of Greek debt, and France has proposed that lenders roll over their loans into new 30-year bonds, giving Greece more time to put its financial house in order.
But the "debt rollover proposal could result in a selective default for Greece," S&P said, while "Greece's near-term reliance on EU/IMF official financing, the government's difficulty in reducing its sizable fiscal deficit, and the current pricing of Greek government debt in the secondary market all underscore the Hellenic Republic's weak creditworthiness."
Rating agencies have warned that they may consider "voluntary" roll overs of debt to amount to default if there appears to be an element of duress.
The European Central Bank, which is the biggest single holder of Greek public debt with around 47 billion euros' worth of sovereign bonds, according to Deutsche Bank Global Markets Research, has warned it could not accept more debt as collateral for loans if Greece is declared to be in default.
That could crush Greek commercial banks that now depend on ECB financing and send shock waves to banks in other debt-laden eurozone countries like Ireland and Portugal.
ING rates strategist Padhraic Garvey said he was not surprised by the S&P announcement, since the French banking proposals comprised a mark-to-market write-down of investments in Greek debt.
He quoted a Fitch analyst as saying, "if it smells like a default, it will be classed as a default."
Meanwhile, the Institute of International Finance, an umbrella group for banks, insurers and investment managers, said its members might be willing to aid in a buyback of Greek debt, which would have the advantage of actually reducing the stock of Greek debt.
After eurozone ministers agreed to the next round of aid for Greece, Polish Finance Minister Jacek Rostowski warned that "we can't afford to relax and we need to move forward as fast as possible, both on the eurozone and IMF side."
Poland currently chairs the rotating EU presidency but is not part of the 17-nation eurozone.
Eurogroup chief and Luxembourg Prime Minister Jean-Claude Juncker said Athens must be ready for foreign intervention to help it implement reforms.
"The Greeks' sovereignty will be massively constrained," he told the German magazine Focus.
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