Greek Debt Plan May Place It in Selective Default, S&P Says
The French proposal would qualify as a distressed debt restructuring because it offers creditors “less value than the promise of the original securities” and would therefore put Greece in default, S&P said in a statement today.
Europe is inching toward a goal of getting banks to roll over 30 billion euros ($44 billion) of Greek bonds, instead of opening a hole for the official lenders to fill. French banks, with the biggest holdings in Greece, worked out a rollover formula that is serving as an example elsewhere, with two options for bondholders to replace their maturing securities.
“It is our view that each of the two financing options described in the Federation Bancaire Francaise proposal would likely amount to a default,” S&P said in the statement. “But, once either option is implemented, we would assign a new issuer credit rating to Greece after a short time reflecting our forward-looking view of Greece’s sovereign credit risk.”
European Central Bank President Jean-Claude Trichet reiterated last week that the ECB opposes “all concepts that are not purely voluntary” and called for “the avoidance of credit events or selective default or default.” He declined to comment on the French proposal.
S&P would assign a “D” rating to the maturing Greek government bonds “upon their refinancing in 2011,” it added. All debt issues would then “likely” be rated at the same level as the new Greek rating afterwards.
“They are clearly creating a problem with what has been discussed,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “It’s a risky exercise and it looks from S&P’s perspective that they’re going to take no prisoners on it. It will be a downer for the periphery, above all for Greece, and will give bunds a bit of support.”
Fitch Ratings said June 15 it would probably keep ratings of Greek government bonds above default level if European Union leaders go ahead with plans for investors to voluntarily roll over their debt, while lowering Greece’s issuer rating to “restricted default.”
European finance ministers have authorized an 8.7 billion- euro loan payout to Greece by mid-July, basing a second three- year bailout package on talks to corral banks into maintaining their Greek debt holdings.
Under one option of the French plan, private investors would reinvest 70 percent of their original holdings in 30-year Greek bonds, with the remaining 30 percent paid in cash on maturity. Greece would use 50 percent of the original amount to meet its financing needs with the remaining 20 percent invested in zero-coupon bonds through a so-called special purpose vehicle to serve as collateral to insure the banks get their principal repaid.
The new 30-year bonds will have a coupon of 5.5 percent with a bonus based on the growth of Greek gross domestic product of up to 2.5 percentage points. The special purpose vehicle will invest in AAA-rated securities that will be held as collateral to protect the banks against a Greek default or be used to pay off the new 30-year bonds at maturity if Greece remains solvent. The second option of the French plan foresees rolling over at least 90 percent of the maturing bonds into new 5-year bonds with a 5.5 percent coupon.
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