The words which count in eurozone-Greece crisis

(PARIS) - A single word, default, what it means, how it works and the damage it could spread around the world is the fulcrum of the next step in the Greek-eurozone debt crisis.

An EU summit meeting at the end of this week endorsed an approach for a new bailout combining fresh eurozone loans and help from banks and other private investors, saying that a roll over of Greek debt bonds should be "informal and voluntary".

For weeks analysts on financial markets have debated two questions, when is a default not a default, and when is a voluntary restructuring of debt in fact an enforced loss for investors.

The European Central Bank has issued a stark warning, notably to Germany which led the case for a restructuring of Greek debt.

The ECB said that if a redrawing or reprofiling of the debt were to provoke a "credit event" meaning a de-facto default, then the bank might cut off lifeline liquidity to Greek banks.

Under a roll over, considered to be the least painful option, private creditors such as banks, insurance companies and savings funds, would agree to exchange existing loans with a given date for repayment for new loans to be repaid at a later date.

Based on the so-called "Vienna initiative" widely credited for having saved eastern Europe's financial system from collapse in 2009, private creditors would receive the same interest fixed at issue, and the same amount repaid at maturity.

But they would have to wait longer for their money, consequently suffering losses in terms of the rate of return on their investment and disruption to their own financial planning.

A deeper form of restructuring would require private bondholders to take "haircuts," market jargon for repayment of less than the full amount lent.

And a third element could theoretically involve a reduction of the interest paid.

The negotiations turn on the lesser roll over solution.

But the three top international credit ratings agencies have threatened to downgrade Greek sovereign debt even further to "default" status, even if the participation of private bondholders were declared "voluntary".

The agencies argue that if new terms were accepted only to avoid worse effects later, this would amount to agreement under duress.

This is what the ECB fears would amount to a "credit event" with potentially disastrous repercussions, notably draining funds from Greece, and that it might then have to cease pumping liquidity into Greek banks.

Standard & Poor's downgraded Greece's long-term sovereign debt outlook to 'CCC', an extremely low rating, on June 13.

"In situations where investors consider a default to be possible and where the rating has fallen, it becomes more difficult to conclude that investors are exchanging securities voluntarily," the agency has explained.

"For example, while an exchange for longer-dated bonds may appear to be 'voluntary,' we may conclude that investors have been pressured into accepting because they fear more adverse consequences were they to decline.

"In such a 'distressed' exchange, holders accept less than the original promise, because of the risk that the issuer will otherwise fail to meet its original obligations," it said.

Fitch Ratings and Moody's International take a similar line, indicating that they will examine whether bondholders reluctant to participate will suffer penalties. If so, the agencies would consider that Greece had defaulted.

An economist and professor at the Frankfurt School of Finance, Horst Lochel, warned: "If there is nothing for creditors to gain from their participation, they won't play the game."

The president of the German private banking body BdB, Michael Kemmer, also said that it was "obvious" that there had to be incentives to attract creditors to participate.

Economists at ING bank wrote recently, referring to the International Swaps and Derivatives Association: "A roll over will not be an ISDA defined credit event, but the ratings agencies will likely define it as a default.

"The defining element to avoid it being a credit event is that the principal is rolled over at par (meaning face value), and the coupon (interest paid) kept intact.

"But classification as a default is likely as any sensible analysis would show that the roll over leaves the bond holder worse off than accepting redemption up front at par."