By Richard Milne in London
July 4, 2011 -- Updated 1203 GMT (2003 HKT)
Standard & Poor's said plans by European banks to roll over their holdings of Greek debt would amount to a default.
(FT) -- French and German banks' plan to roll over their holdings of Greek debt suffered a blow on Monday as Standard & Poor's, the credit rating agency, said the move would amount to a default.
The proposal to provide up to €30bn ($43.6bn) in financing for Greece had been made conditional on rating agencies not downgrading Greece's debt. But S&P said in a statement early on Monday that any rollover would be a "distressed" transaction and thus lead to Greece's rating being lowered to selective default.
There was no immediate reaction from the Greek finance ministry to the S&P statement on Monday.
This follows a similar statement from Fitch, the third-largest rating agency, who said in a recent letter to the FT "if it looks like a default, we will rate it as a default".
Over the weekend, the European Union warned Greek growth would contract 3.75 per cent this year underlining the challenge facing the country. The downgrade followed the agreement on Saturday by European finance ministers of a loan tranche of €8.7bn to Athens, ensuring the government would be able to meet debt repayments due this month.
The main proposal by the French banking federation would see investors reinvest 70 per cent of their holdings that mature in the next three years into new 30-year Greek bonds. The bonds would pay an interest rate of between 5.5 per cent and 8 per cent depending on the strength of Greek economic growth.
The other proposal was for investors to buy new 5-year bonds with a 5.5 per cent interest rate with the money they receive from maturing debt before mid-2014.
S&P said both proposals from the French banking federation -- which were broadly endorsed by both German banks and other global financial institutions -- would amount to a default.
The move by S&P all but scuppers the rollover proposal in its current form. It is also likely to further heighten European scrutiny and scepticism of rating agencies, who are blamed by some for stoking the eurozone debt crisis as well as having missed the causes of the 2008 financial crisis.
The rating agency pointed to the unusual length of the 30-year bonds as a reason for a default, arguing that issuers with Greece's speculative credit rating rarely issue such long debt.
"If either option were implemented in its current form, absent other mitigating information, we would likely view it as constituting a default under our criteria," said S&P.
"We understand that the FBF proposal may change, and it is possible that it could take a form that results in a different rating outcome."
Both proposals were meant to help give Greece up to €30bn in new financing as part of the mooted second bail-out for the highly indebted country. But analysts were sceptical that the rollover would provide so much money.
Gary Jenkins, head of fixed income at Evolution Securities, called S&P's move "a brave decision" that meant it "might be back to the drawing board" for banks.
"We are in such strange and dangerous times and anything is possible. It might be that a completely different form of bail-out has to take place, such as guaranteeing Greek debt or buying it back," he added.
The Institute of International Finance, a grouping of some of the world's largest banks, on Friday backed the rollover plan but also called for other options to be explored, such as debt buy-backs. Policymakers had previously floated the idea that the European financial stability facility, the temporary bail-out vehicle, could buy back Greek debt on the market but the idea was torpedoed by Germany and others.
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