One thing is likely after this week’s negotiations in Brussels: Greece will become the first western developed world country to default in more than 60 years.Strategists expect all three main rating agencies to determine that Greece has defaulted, because bondholders will suffer losses whatever plan policymakers decide to adopt involving private creditors. The options are debt exchanges, rollovers or buy-backs.
Although all three rating agencies were not commenting on Thursday, strategists say Standard &Poor’s is likely to put Greece on selective default, while Fitch will follow a similar route and put the country on restricted default, which is the same thing.
Strategists assume Moody’s will announce that Athens is in default, even though the agency does not have a specific default rating.
The terms “selective” and “restrictive” default mean Greece as an issuer will default, but only some of its bonds will be downgraded. Bonds that are not affected by whatever private creditor plan is used will not be defaulted.
An issuer default would normally mean that the European Central Bank would not be able to accept Greek bonds as collateral for loans. That development would bring the entire Greek banking system, which relies on the ECB to fund itself, to a standstill, presenting a serious threat of contagion to other banks and bond markets across the eurozone. That is why Jean-Claude Trichet, the ECB president, has for weeks rejected the idea of a short-term or selective default.
For this reason, with the default scenario likely, the ECB is expected to make Greece a special case and waive its rules that do not allow it to accept defaulted bonds as collateral.
Many strategists say a default may not have a big effect on the market as Greece would only default on a temporary basis. Both Standard & Poor’s and Fitch are likely to upgrade the country’s rating back to triple C, a low junk-grade status, once the debt exchange, rollover or buy-back has been initiated to reflect a forward-looking view of Athens, with its reduced debt burden. Underlining the difficulties in making predictions on market moves, Greek bonds rallied despite the comments because of relief that policymakers appeared ready to take decisive action.
This is because the International Swaps and Derivatives Association (Isda) is expected to rule that the action on Greece is voluntary and does not obligate all investors to take part. Even if a credit event was triggered, Isda say the overall pay-out would only be $5bn, which they say would have little effect on the market or the balance sheets of the banks. However, the euro fell sharply at one point on Thursday after Jean-Claude Juncker, the head of the group of eurozone finance ministers, said Greece would suffer a selective default. The other key point is that default is not the same thing as a credit event or a pay-out in credit default swaps, which insure nvestors against bond defaults. A credit event is not likely to be triggered, say most strategists.
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