S&P: EU & IMF Bailout of Greece will still lead to Default

The last couple of days haven't been good news for the Greek bailout. On Sunday, how bad Greece's numbers are turned out to be even worse than first thought. On Monday, S&P announced that the Greek bailout would still amount to a default.

New figures published by the European Commission make clear just how big Greece’s budgetary hole now is. Over the next three years, the Commission says Greece will need €172bn in financing. But the current bail-out only has another €57bn left – meaning €115bn has to be found.
Greece itself has committed to raising €30bn on its own by privatising government assets. The rest was supposed to be signed off on Sunday. But according to several officials involved in the talks, the decision was held up by an inability to agree enough commitments from private bondholders.
A German-led group of creditor countries, including the Netherlands, wants private bondholders to shoulder a “significant” portion to get support in their national parliaments. Although neither Berlin nor The Hague has given specific figures, both have hinted at anywhere from €20bn to €30bn.
But talks with large holders of Greek debt – French, German and Greek banks – have seen much smaller commitments. A deal with German banks on Thursday netted €3.2bn, while the French-backed plan has raised doubts as to whether it will lower Greece’s debt burden at all.
All four of Greece’s biggest banks have said they will participate, and some executives have suggested they could commit to rolling over as much as €12bn in government debt into new, longer-maturing bonds. But government officials involved in talks with Greek banks anticipate a lower total – closer to €3bn-€4bn. Given the fragility of the Greek banking sector, officials are concerned that any additional commitments could weaken the entire system. . . .

The news on the S&P decision is discussed here.

French and German banks’ plan to roll over their holdings of Greek debt suffered a blow on Monday as Standard & Poor’s, the credit rating agency, said the move would amount to a default.
The proposal to provide up to €30bn ($43.6bn) in financing for Greece had been made conditional on rating agencies not downgrading Greece’s debt. But S&P said on Monday that any rollover would be a “distressed” transaction and thus lead to Greece’s rating being lowered to selective default.
There was no immediate reaction from the Greek finance ministry to the S&P statement. French officials said they were not unduly concerned by the move, which had been anticipated. “It should have no immediate impact on the CDS [credit default swap] markets,” one said.
The German government also had no official comment. But civil servants said they had factored in the eventuality of a so-called ratings event from the beginning.
“The important thing is that we avoid a credit event, with all the resulting negative impact on credit-default swaps which occupied us after the Lehman bankruptcy,” one official said. “If private sector participation does lead to a partial default being called, the biggest problem we’ll face is persuading the ECB to continue to take affected bonds in exchange for providing liquidity to Greek banks.”
But officials also stressed that S&P’s analysis was based on the model for private sector involvement sketched by French banks. “Of course, that’s the basis of what’s likely to come out,” one said. “But we’re still working on all sorts of details and maybe we’ll find ways of even working around the partial-default problem.” . . .

The WSJ had this nice summary.

Standard & Poor's has ruled that a plan by French banks to roll over their exposure to Greek government debt would likely be considered a Greek default. That puts efforts to find a lasting solution to Greece's debt crisis back at square one. Europe's politicians may yet have to compromise and provide a bigger public-sector bailout for Greece. . . .

That puts the euro zone in a bind. Its finance ministers have made clear any new Greek bailout must include significant private-sector funding. But the ECB has repeatedly warned it won't accept defaulted Greek bonds as collateral for its lending operations. It believes this would damage its credibility and encourage further defaults, undermining confidence in the currency. But if the euro zone and ECB stick to their guns, the Greek banking system will collapse. . . .