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S&P sees one plan to ease Greek debt as a default

The euro symbol in front of the European Central Bank in Frankfurt. Euro zone finance ministers agreed to financing of $12.7 billion to help Greece function through the summer. The euro symbol in front of the European Central Bank in Frankfurt. Euro zone finance ministers agreed to financing of $12.7 billion to help Greece function through the summer.
(Daniel Roland/AFP/Getty Images)
By Jack Ewing and Landon Thomas Jr.
New York Times / July 5, 2011

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FRANKFURT - As Europe turns from its latest short-term fix for Greece to planning a longer-term bailout for the debt-plagued country, the ratings agency Standard & Poor’s indicated yesterday how difficult it would be to off-load some of the cost of rescuing Greece onto creditors without also provoking a default that could shock the global economy.

Representatives of European governments and banks, continuing talks that have been underway for several weeks, expressed optimism that they could find ways that bond holders could voluntarily contribute to reducing Greece’s debt.

But S&P, responding to a French proposal to have banks give Athens more time to repay loans as they come due, seemed to leave little room for maneuvering. The proposal would amount to a default, S&P said, because creditors would have to wait longer to be repaid and the value of Greek bonds would effectively be reduced.

“Ratings agencies are saying, ‘We don’t think it’s voluntary; it’s just a way to hide a default’ - which it is,’’ said Daniel Gros, director of the Center for European Policy Studies in Brussels.

European leaders are trapped between domestic political demands for banks to share the cost of a Greek bailout, and the dire consequences of a default. These would include the collapse of Greek banks, probably followed by the collapse of the Greek economy, and Greece’s exit from the euro zone.

A crisis in Greece could quickly spread to European banks, particularly in France and Germany, which own government bonds or have lent money to Greek individuals and businesses. Ratings of French banks have suffered because of their vulnerability to the Greek economy.

As a result, officials predicted, European governments may have little choice but to abandon or modify the voluntary plan and fill the gap with more money from taxpayer coffers.

A senior figure in the Greek finance ministry, who spoke on condition of anonymity because he was not authorized to speak publicly, said yesterday that it was folly to think that the ratings agencies would view a debt swap as purely voluntary and not representing a selective default.

“Now the official sector will need to find another 30 billion [euros],’’ this person said, referring to the $43.6 billion that European political leaders hoped to get from the private sector. That sum was never realistic in the first place, he said.

But he predicted that leaders would not turn their backs on Greece.

Despite the discouraging assessment from Standard & Poor’s, European governments continued work on a contingency plan that they predicted would satisfy the ratings agencies and prevent Greece’s problems from provoking a wider crisis.

There was somewhat less urgency to the talks after euro zone finance ministers agreed over the weekend to provide Athens with financing of $12.7 billion from the $160.02 billion bailout agreed to last year, to help the Greek government function through the summer. The new aid eliminates the prospect of a near-term default.

But the finance ministers put off the question of how to provide a second bailout, expected to total as much as $130.03 billion, to keep the country operating through 2014, when it is hoped that Greece will be able to return to the credit markets.

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