BUSINESS
07/04/2011 07:11 EDT | Updated 09/03/2011 05:12 EDT

S&P Warns Greece Would Be In Default Under French Proposal

AP File

THE CANADIAN PRESS -- LONDON - A leading credit ratings agency warned Monday that Greece would be considered to be in default if banks rolled over their holdings in the country's debt as proposed by a French plan.

Standard & Poor's said in a statement that two proposals 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."

Analysts warned that the S&P's position could wreak havoc on Europe's attempts to deal with the Greek debt crisis, especially if rivals Moody's and Fitch come to the same conclusion. A so-called "selective default" could trigger massive insurance claims on Greek bonds, likely triggering another bout of turmoil in the financial markets.

"A default is exactly what the European politicians want to avoid," said Louise Cooper, markets analyst at BGC Partners. "I imagine there are a lot of phone calls being made between the European political elite and the bosses at S&P."

The French Finance Ministry and leading French holders of Greek sovereign debt -- banks BNP Paribas and Credit Agricole -- would not comment Monday on the S&P warning.

S&P's statement comes just a week after French banks said they were ready to help Greece by accepting a significant debt rollover. Germany's banks later said they were also considering helping out on similar terms as the French plan.

One proposal involved them reinvesting at least 70 per cent of their proceeds of maturing Greek government bonds in newly-issued 30-year Greek bonds, backed up by high quality debt from other countries. The interest rate would be linked to Greece's economic growth and their trading would be restricted.

A second option being considered would see French financial institutions investing at least 90 per cent of the proceeds of expiring Greek bonds in newly-issued five-year bonds. There would again be restrictions on their trading and the bonds would have the same interest rate formula as the 30-year issue.

The proposals received a fair degree of support, not least from French President Nicolas Sarkozy.

Policymakers across the eurozone are trying to come up with a second bailout for Greece that involves some involvement by the private sector.

French banks are among the biggest holders of Greek sovereign debt -- some €15 billion ($21 billion). Germany's financial sector is also heavily exposed to the tune of €16 billion ($22.7 billion), according to the Bank of International Settlements.

Greece avoided a near-term default on its debts after its Parliament backed further austerity measures in return for more bailout money from international creditors.

Over the weekend, finance ministers from the eurozone agreed to release the vital installment of aid money for Greece but confirmed they will leave the final decision on a second bailout for the debt-ridden country until later this summer.

They agreed to sign off on an €8.7 billion ($12.6 billion) tranche of Greece's existing. An extra €3.3 billion will come from the IMF after its board's expected decision to authorize the payment in a meeting later this week.

Without the €12 billion, Greece would have defaulted on its massive debts within days.

The country needs tens of billions of euros in further assistance over the coming years, but ministers have delayed a second aid package until they know how much banks and other private creditors will contribute.

S&P's warning comes in the wake of last month's decision to slap a triple C rating on Greece -- leaving Greece at the bottom of the pile of 131 countries the agency gives ratings to.