S.&P. Warns Bank Plan Would Cause Greek Default

S&P said this morning a French plan to allow Greece to voluntarily change the terms on some of its debts when they come up for repayment would, "likely amount to a default under our criteria".

French banks, which hold some of the biggest exposures to Greek government debt, want to allow the country to extend the maturity of its bonds, which S&P said could be defined as a "selective default".

The default threat came as Greece was told yesterday by the chairman of the Eurogroup of finance ministers that it must privatise assets on a scale similar to the sell-off of East German companies at the fall of the Berlin Wall to rebuild its finances.

"The sovereignty of Greece will be massively limited," Jean-Claude Juncker, who is also prime minister of Luxembourg, told Germany's Focus magazine.

On Saturday finance ministers signed off the release of the latest €12bn (£11bn) tranche of aid, rewarding the Greek government's victory in a parliamentary vote on austerity measures.

European officials are anxious to avoid setting off a default, Gilles Moëc, an economist at Deutsche Bank in London, said, because that could lead to a crisis in relations with the European Central Bank.

The E.C.B., which itself holds billions of euros worth of Greek debt, has said it could only accept the participation of bondholders in any restructuring if it were “entirely voluntary.”

The central bank — which has been helping Greece by buying its debt on the secondary market — “doesn’t want to jeopardize publicly its balance sheet anymore,” Mr. Moëc said. “It’s one thing to say they’ll accept Greek government bonds, it’s another thing to have something on their balance sheet that has ceased to pay, which is the definition of default.”

“It doesn’t mean the Greek securities are not going to be paid,” he said, adding: “The E.C.B. would be able to accept them if the final structure was relatively healthy. One thing the E.C.B. doesn’t want is any infringement of its right to decide on the collateral that it accepts.”

A finding by the credit ratings agencies of default would also require the E.C.B. to impose discounts, known as haircuts, on the Greek debt it has accepted as collateral. That would inflict more financial pain on banks holding that debt.

Angela Merkel, the German chancellor, has pointed to another problem, noting that default would trigger the repayment of credit default swaps — effectively, insurance policies — tied to Greek debt, with potentially devastating consequences for the world financial system.