FRESH DOUBT was cast over the effort to prop up Greece yesterday as Standard Poor’s declared it would deem a French plan to extend the maturity of the country’s sovereign debt to be a “default” event.
The move comes as euro zone leaders try to enlist private creditor participation in a second EU-IMF bailout for Greece to ease parliamentary passage of the plan in countries like Germany, the Netherlands and Finland.
A spokesman for EU economics commissioner Olli Rehn declined to comment on S&P’s assessment of the French initiative, the most prominent to date of the plans in which private investors would “bail-in” to the rescue effort.
However the agency’s findings underscore the acute difficulty faced by euro zone finance ministers as they pursue private creditor participation without triggering a selective default on Greece’s sovereign debt.
Its assessment of the plan follows weeks of turmoil on sovereign bond markets over the release of a €12 billion bailout loan to Greece. This pressure has led to anxiety in Dublin that it could damage Ireland’s effort to return next year to private debt markets.
The ministers had been expected to push for agreement on a second bailout for Greece at a scheduled meeting in Brussels next Monday, but a final deal is not now expected until the autumn.
Mr Rehn’s spokesman said the authorities still “expect necessary progress in this meeting of the euro group in order to have clarity about the main features of the successor programme”.
The second rescue is required to address concerns in the IMF about the uncertain funding outlook for Greece over a 12-month period.
The talks have been hampered by uncertainty about the attitude of credit rating agencies towards initiatives to secure private creditor participation. In its first public comment on the French plan SP made clear its doubts.
“In brief, it is our view that each of the two financing options described in the Fédération Bancaire Française proposal would likely amount to a default under our criteria.”
S&P said two proposals are under discussion in Paris, adding that each would result in a default. This is significant as French banks, who have backed the FBF initiative, are the biggest investors in Greek sovereign debt.
In the first plan French institutions would invest 70 per cent of the proceeds of their maturing Greek government bonds in newly-issued 30-year Greek government bonds. In the second the institutions would invest 90 per cent of the proceeds of maturing Greek government bonds in new five-year Greek government bonds.
S&P said transactions viewed as “distressed rather than purely opportunistic” would qualify as an effective default. The same applied to transactions resulting in investors receiving less value than the promise of the original securities.
“Thirty-year bonds under the first option is far longer than the original maturities of any outstanding Greek government bonds, and we take the view that the intent of such extended maturities is to slow the timing of future principal repayments quite significantly,” it said.
“We also note that speculative-grade rated issuers rarely, if ever, are able to access market financing with such a long tenor.
“Taking these considerations into account, we believe that both options represent (i) a ‘similar restructuring’ (ii) are ‘distressed’ and (iii) offer ‘less value than the promise of the original securities’ under our criteria.
“Consequently, if either option were implemented in its current form, absent other mitigating information, we would likely view it as constituting a default under our criteria.”
