EU officials and governments have been scrambling to strike a “burden-sharing” deal to share the cost of a new bailout with European banks. But they have been constrained by the need for any deal to avoid a “credit event” – thought to involve a ratings agency downgrade to “default”.
Last week, French and German banks agreed to participate in a “Greek Brady plan”, in which they would roll over most of their Greek debt in return for high interest rates and high-quality collateral.
But S&P says that even with its generous terms, the plan would constitute a Greek default because the exposure that banks would have to maintain to Athens would involve extending the maturity of the country’s debt and restricting banks’ use of the bonds until their new maturity date.
S&P said the Greek Brady plan would be an effective default because “the transaction is viewed by us as distressed rather than purely opportunistic”.
The agency’s stance could make it much more difficult for European politicians to pursue the face-saving plan to get banks involved, throwing negotiations into chaos.
A default, or “credit event” would force the ECB to ignore its own rules in order to continue to accept Greek debt as collateral, without which it could not supply the emergency liquidity on which the country’s banks depend.
People familiar with the ECB have previously suggested the central bank would accept Greek debt even if some ratings agencies downgrade.