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French Greek Rollover Plan Depends on No Default Rating

A demonstrator clashes with riot police in front of the Greek Parliament, during a 48-hour general strike, the first in the modern history of Greece, in Athens, Greece, June 28, 2011. Photographer: Orestis Panagiotou/EPA

A proposal by French banks to roll over Greek debt depends on credit-rating firms not cutting Greece and existing or newly issued government securities to default, according to a draft of the plan.

European banks and insurers are using the French proposal as a blueprint for discussions toward an agreement to meet politicians’ calls that they contribute to Greece’s second rescue in two years.

Fitch Ratings will “very likely” deem Greece in default if the European Union goes ahead with a plan to get private investors to roll over their Greek bonds as part of the Greek rescue.

“Fitch would very likely view such a scenario as a sovereign-default event and place the Greek sovereign rating into restricted default,” David Riley, Fitch’s London-based head of sovereign ratings, wrote in a letter in the Financial Times today. A spokesman for Standard & Poor’s declined to comment.

EU leaders are pushing for private investors to shoulder some of the cost of a new aid plan for Greece and are seeking to convince bondholders to roll over at least 30 billion euros ($43 billion) of Greek debt maturing in the next three years into new securities to help the country close a funding gap.

Bond Guarantee

Under the French plan, owners of Greek bonds maturing by mid-2014 would agree to roll over 50 percent of their holdings into new Greek bonds with a 30-year maturity. Another 20 percent will be used to buy zero-coupon AAA-rated bonds through a special-purpose vehicle to act as collateral against a possible Greek default.

The new 30-year bonds will have a “full-principal guarantee by a SPV collateralized by zero-coupon bonds purchased from one or more AAA-rated sovereigns, supranational institutions, or European agencies,” the document said.

The new Greek bonds would have an interest rate of 5.5 percent and investors would receive a bonus on the coupon equivalent to Greek gross domestic product growth of up to 2.5 percentage points.

Under a second option, investors would agree to roll over 90 percent of their holdings in five-year Greek bonds with an interest rate of 5.5 percent, the document said.

The plan is working on the assumption that there are 85.5 billion euros of Greek bonds maturing between July and mid-2014 and that the European Central Bank and other euro-region central banks own 25 billion of that amount, the document says.

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