Greece’s Last Stand: S&P Rejects Bank Rollover

The will of Greece’s parliament to institute austerity measures was tested to the break point last week. Plans to reduce the deficit carried by a razor thin margin. It turns out that the margin may not be enough. Parliament will probably need to offer more concessions, which is unlikely in the present environment. The chance to salvage Greece looks closer to impossible again.

A “rollover” of Greek debt held by private banks is essential to the cure of its sovereign obligation trouble. S&P has deemed that action as tantamount to a default.

The credit rating agency writes:

In summary, the growing risk that the Hellenic Republic might engage in a distressed debt restructuring was one of the reasons we lowered its rating on June 13  While we would likely view the Federation Bancaire Francaise  proposal, if it proceeds in its current form, as an effective default, we recognize that it is just one of a number of proposals attempting to address the Greek government’s 2011-2014 financing needs and the sustainability of its future debt burden.

In effect, one of the foundation proposals of the Greek rescue, which would probably be mirrored by actions of German banks, will not work. A number of officials of EU nations have said the private sector must participate in a new Greek plan. The S&P ruling, at first reading, rules that out.

The French bank group had tentatively agreed to exchange as much as 70% of its holding in sovereign Greek paper into 30-year notes with a 5.6% interest rate. That is sharply below what Greece’s debt yields now. From an economic standpoint the action could be a fair exchange. Greek paper may pay high rates now, but is certain to lose nearly all of its value without the 100 billion euro package planned by the EU and IMF.

French and German banks have reviewed other options, and may now try to take them. One would be the purchase of new five year bonds. These options may not be accepted by S&P and other credit rating agencies either.

The S&P warning makes a rescue of Greece much more improbable. Some nations in the EU, which have so far included Germany, occasionally insisted that private sector interests would need to participate in the risk of any rescue. The ECB has said it will not accept any paper deemed as in default as collateral.

What is not clear yet but is more likely now is that the Greek parliament may need to go back to its meticulous plans. Greek’s legislators barely accepted the last series of austerity programs  proposed by Prime Minister George Papandreou. Public pressure nearly wrecked the odds that his original package would be passed. Riots and strikes have made the jobs of politicians more difficult.

Greek opposition leader Antonis Samaras, head of conservative Nea Dimokratia, can now make a move to effectively take over power in parliament. He has said before that the sacrifices of Greek citizens are already too great. He public comments that Greece will be “taken over” by EU finance interests has made him extremely popular with voters.

The S&P action makes the odds that Greece will reject austerity measures of any kind higher. It makes the chances that the EU and IMF will accept a default higher as well. It was always likely that street riots might be enough to sway many politicians. They now have another reason to be swayed.

Douglas A. McIntyre