EU Rescue Could Lead to Greek Default

Standard & Poor’s warned that the plan seen as the best chance to push through a desperately needed second bailout for Greece might not save the country from receiving a default rating. European politicians have been touting a plan pushed by French banks for large private creditors to roll over their holdings of the country’s debt. The move, which German banks also seem to support, essentially means that private lenders would voluntarily renew some of their Greek bonds when they become due. The plan is seen as a way for private creditors to share some of the pain of a politically sensitive second bailout. But S&P made it clear that it would consider it as a distressed exchange and would likely lead to a “selective default” grade, reports Bloomberg.

S&P isn’t the first rating agency to make this kind of warning. Earlier, Fitch wrote a letter to the Financial Times explaining that “if it looks like a default, we will rate it as a default.” Although a Greek default is unlikely to set off another financial crisis, it would wreak havoc if investors begin abandoning debt of other EU countries, particularly Portugal and Spain. Also, as the New York Times points out, “the giants of Wall Street have built a tower of credit default swaps … on the debts of those countries, and the cost of paying up in default would be huge.” Experts say that if there is a downgrade into default territory the key will be to convince the European Central Bank to continue taking Greek debt.

S&P released its statement two days after Euro zone finance ministers authorized the release of the latest installment of $12.6 billion in bailout cash for Greece. But they left unanswered the question of how to go about granting the second bailout that would help the country continue operating until 2014.