Hopes receded for a smooth and "voluntary" restructuring of Greece's sovereign debt yesterday when a leading credit ratings agency said that such a move would still constitute "selective default".
The cost of insuring Greek and other peripheral eurozone economies' bonds soared again, with the premium asked for insurance against a Greek default hitting 19 percentage points of the principal. It is a further knock-back to hopes that private sector bondholders will be able to ease the cost of a second eurozone/IMF bailout, estimated to be about €120bn (£108bn) – after the €110bn package last year.
Standard & Poor's said that two proposals put forward by an association of French banks "would likely amount to a default" under its criteria because both options offer "less value than the promise of the original securities".
If the other agencies, Moody's and Fitch, follow suit it will make it much tougher to achieve a deal that involves any cost to the private sector – even if the commercial banks want to volunteer to pay a portion of the cost of a rescue. That, in turn, will inflame public opinion in nations that will have to foot the bill. The embryonic plan, proposed by a consortium of French banks, some heavily exposed to Greece, and supported by the German institutions, would be for banks and other private sector investors to accept a combination of longer maturities or lower coupon payments when their Greek bonds became due for repayment. New bonds of up to 30 years would be swapped for the old securities, and part of the proceeds used by the Greek government to invest in other, AAA-rated securities.
Although in the case of the German banks the sacrifice is comparatively small – only €2bn – it is politically vital for the German government to demonstrate that the pain was not being entirely borne by their taxpayers. Similar political obstacles to a new deal also exist in Finland and the Netherlands.