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S&P warns EU over French plan

Athens, July 5, 2011

Credit ratings agency Standard & Poor's has cast new uncertainty over euro zone efforts to rescue debt-crippled Greece by warning it would treat a French bank plan for a rollover of privately-held debt as a default.

The threat ended a relief rally in stock and bond markets after Greece adopted a new, tougher austerity plan last week, prompting euro zone finance ministers to agree on Saturday to throw Athens a 12 billion euro short-term lifeline.

Bank stocks fell in Europe and the cost of insuring Greek debt against default resumed an inexorable climb briefly interrupted last week when Greek parliament backed a new wave of spending cuts, tax rises and public asset sales.

Investors fear a default by Greece, which has seen violent protests against austerity, would send shock waves through the world finance system with analysts saying it could call the euro zone into question.

While S&P warning did not deal a death blow to the complex rollover plan - seen by critics as a bailout for creditor banks rather than for Greece - it highlighted the difficulty of arranging private sector involvement in a second rescue package.

"It is our view that each of the two financing options described in the (French banks') proposal would likely amount to a default under our criteria," S&P said.

North European creditor nations, led by Germany, are insisting that banks and insurers must share the burden of any new financial support for Greece, which is estimated to need some 120bn euros in new funding until 2014.

French banks, major holders of Greek sovereign debt, proposed voluntarily renewing some bonds when they mature but on different terms.

Investors and economists believe Greece will have to restructure its debt in the medium-term and the bailouts are only buying time and shifting the eventual cost from banks to taxpayers.

"The relief we had last week with the votes is now somewhat put on the back burner by this news from S&P," said Monument Securities strategist Marc Ostwald. "It would be nice to have more details on it."

S&P has been the most hawkish on Greece, downgrading its sovereign rating to CCC last month from B on a view that any restructuring of its 340 billion euro debt pile - 150 per cent of annual economic output and rising - would count as an effective default.




Tags: S&P | Euro zone | warn | rating agency | French plan |

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