European officials hope to arrange a private sector rollover of debt as a key part of a new rescue plan for Greece, but officials at credit rating agencies said on Monday they might well classify a rollover as a default.
Struggling to justify fresh aid for Greece to their taxpayers, governments of donor states in the euro zone want private sector investors to bear part of the burden of a new bailout that would effectively replace the 110 billion euro scheme agreed with Athens last year.
But the European Central Bank has warned against any restructuring of Greek debt, saying it could destabilize financial markets. So European Union officials are exploring the idea of a voluntary rollover in which private holders of Greek government bonds would agree to maintain their exposure by purchasing fresh bonds as existing ones matured.
Officials say the rollover might be similar to the Vienna Initiative, launched in eastern Europe in 2009; in that scheme, parent banks agreed to keep credit lines open to subsidiary banks in Romania, Latvia, Hungary and Serbia.
Rating agencies warned, however, that they might classify a rollover of Greek debt as a default if investors took part because they feared the consequences of not doing so. That would involve an element of coercion and mean the rollover was not truly voluntary.
A default declaration for Greece could shake markets and lead to rating downgrades for other weak euro zone states, defeating the purpose of a rollover.
"In the case of Greece sovereign bonds, it is difficult to know how a Vienna II initiative could work which was genuinely voluntary and were to generate a significant participation," David Riley, Fitch's managing director of Sovereign and International Public Finance, told Reuters.
"If they agreed to a rollover on existing terms, given that clearly the market would demand different terms for any new lending, that would be problematic in terms of being considered genuinely voluntary and not a distressed debt exchange."
MOODY'S
Moody's Investors Service holds a similar view.
"Vienna-style initiatives purport to be genuinely voluntary. Moody's would seek to assess, both before and after the event, whether that was in fact so," it said in an e-mailed statement.
"If we concluded that there was an element of compulsion, we would very likely class this as a default."
Moody's also said, "Compulsion would be defined very broadly to include circumstances where the lenders believed that absent a continuation of lending or extension of maturities, default would have occurred."
Standard & Poor's, the other major rating agency, said in a report published on Friday that a crucial issue for its decisions was whether investors were truly acting voluntarily, although it did not specifically mention the possibility of a Vienna-style rollover.
"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," S&P said in its report.
"For example, while an exchange offer 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 the exchange offer."
EU officials have been discussing the possibility of encouraging investors to take part in a rollover by making the terms of the new bonds extremely attractive. But if Greece had to offer the sky-high rates of interest which its bonds now carry in the secondary market, that could make the rollover prohibitively expensive for Athens.
Substantially sweetening the terms in other ways, such as giving bonds super-senior status or backing them with Greek government assets earmarked for privatization, could be legally controversial and politically difficult, since it might disadvantage taxpayers in countries which contributed aid.
Reuters
