Photo: Wikimedia Commons
We hate to ruin your 4th of July by bringing you bad news, but…Ratings agency S&P just warned that a proposed Greek bailout plan, supported by French and German banks, which would see bondholders roll their 5-year debt into 30-year debt, would probably count as a default.
Let’s back up a moment though.
This doesn’t have anything to do with the austerity vote taken last week, or the latest slug of cash that has just been released to the struggling country. What this has to do with is the big next phase of the whole bailout process, which has been undertaken with the realisation that the country has no hope unless it can restructure its debt, something that’s proven to be very difficult.
In recent days, both French and German banks announced their support of this rollover idea (details here) as a way of loosening the noose around the Greeks. It’s all been contingent, however, on the ratings agencies not calling this a default, something that’s been dicey from the start, since anyone who agrees to take a 30-year bond in place of a 5-year bond has just suffered a major financial hit.
Earlier reports had indicated that the ratings agencies would be OK with this. Now that’s not so clear.
ZeroHedge has posted the full note. Here’s the key part:
On June 13, Standard & Poor’s Ratings Services lowered the long-term rating on the Hellenic Republic (Greece) to ‘CCC’ from ‘B’. In part, the downgrade reflected our view of the rising risk that an enhanced official financing package addressing the Greek government’s 2011-2014 financing needs could require private sector debt restructuring in a form that we would view as an effective default of its debt obligations under our ratings criteria. In recent weeks, a number of proposals relating to this topic have surfaced, and the particulars in some cases are evidently still in flux. This credit comment looks at the most prominent of the recent proposals, put forward by the Fédération Bancaire Française (FBF) on June 24, 2011, in the context of our criteria for evaluating distressed debt exchanges and similar debt restructurings (see Related Research below). In brief, 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 default has all kinds of negative ramifications. For one thing, the ECB has said that it can’t accept bonds as collateral from a country that has defaulted. It also would be a trigger of CDS, and potentially have other unanticipated spillover effects. Bottom line, this would be Very Bad in the eyes of Europe.
Still we wonder whether the ratings agencies will actually torpedo a deal this way.
This line from AP’s report on the action certainly rings true:
“A default is exactly what the European politicians want to avoid,” said Louise Cooper, markets analyst at BGC Partners. “I imagine there are a lot of phone calls being made between the European political elite and the bosses at S&P.”
There isn’t too long to get this all wrapped up. The new deadline for a Greek resolution is mid-September. Summer won’t be boring this year.