S&P fires warning at Greek debt deal

(FRANKFURT) - Ratings agency Standard and Poor's warned Monday that recent efforts to bailout Greece could amount to a debt default even as Brussels sees progress being made in resolving the crisis.

S&P said that French proposals to involve private creditor banks in rolling over loans to Greek risked putting Greece into a selective default, a possibility with potential domino effects of deep concern to financial markets.

"It is our view that each of the two financing options described in the (French) proposal would likely amount to a default under our criteria," a statement said.

The proposals center on voluntary renewal by the private banks of debt, in the form of bonds, of from five to 30 years that would give Athens some breathing space without actually reducing the amount it owes creditors.

The main point of the exercise is to ease the burden on Greece while avoiding at all costs triggering a debt default which would be disastrous for the country and the wider eurozone.

In Athens, Greek government spokesman Ilias Mossialos said it "could not follow the hypotheses and conclusions of speculative agencies," adding that it would stick with its EU-IMF loan programme as its reference.

The EU Commission said Monday that progress on a new Greek bailout was expected at talks on July 11 but that more time was needed to finalise the private sector's role.

On Saturday, eurozone finance ministers approved the next 12-billion-euro tranche of a rescue worth 110 billion euros ($160 billion) provided in May 2010 by the European Union and International Monetary Fund.

Eurozone finance ministers, however, pushed back an expected announcement on a second rescue package of about the same amount as they sought to ensure ratings agencies would give it their stamp of approval, analysts said.

"Obviously the politicians have yet to agree with the rating agencies how a default rating can be avoided if the private sector is involved," Commerzbank chief economist Joerg Kraemer said.

Some governments, especially in Berlin, insist that private investors share the burden by agreeing to rollover their Greek debt but there is a general concern that the terms of a new rescue mut not amount to a default.

Barclays Capital economists Frank Engels and Antonio Pascual said the delay in unveiling the terms of a new rescue package, revealed "significant uncertainties on the side of official creditors with regard to the resolve of the Greek political elite to stick to the goals and targets" agreed to.

"By not committing yet to a new programme, Europeans thus attempt to keep up the pressure on Athens to push forward with the envisaged reforms throughout the summer," they added.

The European Central Bank has warned against what it terms a "credit event," referring to discriminatory treatment between holders of Greek debt that could lead the ECB to cut its own lifeline support for Greek banks.

The ECB has supported Greece by buying huge amounts of its debt on secondary markets but has said it will not participate in any rollover.

There is also concern that a default could provoke strains in the market for credit default swaps, which act as insurance against default.

If a default is declared, there could be a domino effect which would severely weaken the balance sheets of some banks and insurance companies, raising the spectre of a repeat of the 2006 global financial crisis.

French banks hold a lot of Greece's debt and France has suggested lenders roll over their loans into new 30-year bonds, giving Greece more time to put its financial house in order.

The "debt rollover proposal could result in a selective default for Greece" however, S&P said.

It also said that "Greece's near-term reliance on EU-IMF official financing, the government's difficulty in reducing its sizable fiscal deficit, and the current pricing of Greek government debt in the secondary market all underscore the Hellenic Republic's weak creditworthiness."