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Redefining ‘default’ so that private banks can roll over Greek debt

Monday, July 4th 2011 - 18:05 UTC
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Chancellor Angela Merkel insists private investors share the burden of the rescue plan Chancellor Angela Merkel insists private investors share the burden of the rescue plan

Ratings agency Standard and Poor's warned on Monday that efforts to bailout Greece involving private banks could amount to a debt default even as Brussels sees progress being made in resolving the crisis.

S&P said that French proposals, with German support, to involve private creditor banks in rolling over loans to Greek risked putting Greece into a selective default.

”It is our view that each of the two financing options described in the (French) proposal would likely amount to a default under our criteria,“ a statement said.

The proposals centre on voluntary renewal by the private banks of debt, in the form of bonds, of from five to 30 years that would give Athens some breathing space without actually reducing the amount it owes creditors.

The main point of the exercise is to ease the burden on Greece while avoiding at all costs triggering a debt default which would be disastrous for the country and the wider Euro-zone.

In Athens, Greek government spokesman Ilias Mossialos said it ”could not follow the hypotheses and conclusions of speculative agencies,“ adding that it would stick with its EU-IMF loan programme as its reference.

The EU Commission said Monday that progress on a new Greek bailout was expected at talks on July 11 but that more time was needed to finalise the private sector's role.

On Saturday, Euro-zone finance ministers approved the next 12-billion-Euro tranche of a rescue worth 110 billion Euros provided in May 2010 by the European Union and International Monetary Fund.

Some governments, especially in Berlin and Paris, insist that private investors share the burden by agreeing to rollover their Greek debt but there is a general concern that the terms of a new rescue must not amount to a default.

The European Central Bank has warned against what it terms a ”credit event,“ referring to discriminatory treatment between holders of Greek debt that could lead the ECB to cut its own lifeline support for Greek banks.

The ECB has supported Greece by buying huge amounts of its debt on secondary markets but has said it will not participate in any rollover.

French banks hold a lot of Greece's debt and France has suggested lenders roll over their loans into new 30-year bonds, giving Greece more time to put its financial house in order.

The ”debt rollover proposal could result in a selective default for Greece“ however, S&P said.

It also said that ”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”.

Categories: Economy, International.

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