S&P Warns of 'Selective Default' for Greece

July 5, 2011
Ratings firm downgraded Greece last month.

Plans to roll over Greece's sovereign debt could risk putting the country into a selective default, ratings firm Standard & Poor's warned Monday.

Eurozone finance ministers late Saturday cleared the way for the next 12 billion euro portion of last year's 110 billion euro ($160 billion) EU-IMF bailout for Greece after lawmakers in Athens passed tough austerity cuts.

The deal led to relief across global markets at the end of last week, as many had feared a default could lead to another financial crisis.

But negotiations for a fresh rescue package could be more complicated because some governments want private investors to share the burden by agreeing to voluntarily "roll over" their Greek debt.

France, whose banks hold a sizeable proportion of Greek debt, has proposed among other measures that lenders roll over their loans into new 30-year bonds, giving Greece more time to put its financial house in order.

A second option put forward by the Federation Bancaire Francaise (FBF) proposes that French financial institutions invest 90% of the proceeds of their maturing Greek government bonds in new five-year government bonds.

"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," S&P said in a statement.

The "debt rollover proposal could result in a selective default for Greece," it said.

S&P said the proposal by French banks may change "and it is possible that it could take a form that results in a different rating outcome."

But it maintained that regardless of whether the proposal is implemented, "we continue to believe that (Greece's) uncertain ability to implement the revised EU/IMF program is a key risk weighing on its credit standing."

S&P Downgraded Greece Last Month

S&P last month lowered Greece's long-term rating to "CCC" from "B". Under S&P's definition, a "CCC" rating means "a current identifiable vulnerability to default."

It said one of the reasons for the downgrade was the "rising risk" that the financial rescue package "could require private-sector debt restructuring in a form that we would view as an effective default of its debt obligations."

While the recently approved portion will allow Greece to be able to pay its bills this month, the subsequent rescue package will ensure that Athens can stay afloat until at least 2014.

But European diplomats warn that eurozone finance chiefs are unlikely to finalize a second bailout at their next meeting on July 11 and that Greece may have to wait until September.

Greece meanwhile is under pressure to swiftly implement 28.4 billion euros in budget cuts and tax hikes, and a 50 billion euro privatization program, that the parliament approved last week despite violent street protests.

Finance Minister Evangelos Venizelos has pledged that Athens will fulfill its side of the bargain.

"What is crucial now is the timely and effective implementation of the decisions taken in parliament, so we can gradually emerge from the crisis in the interest of the national economy and the Greek citizens," he said.

As well as Greece, Ireland and Portugal also have had to seek bailouts while other eurozone nations such as Spain and Italy have been forced to slash budgets to avoid the same fate.

Copyright Agence France-Presse, 2011

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