The euro fell against the dollar, losing around half a cent to $1.4513, after S&P released its analysis.
Under the Fédération Bancaire Française (FBF) plan, banks would invest some €30bn of maturing Greek debt in new bonds issued by Athens, which would not mature for up to 30 years. These securities would have an interest rate linked to Greece's GDP, and their sale would be restricted. The proposal won support last week from Germany, which is keen for private creditors to share the cost of a new rescue package worth an estimated €110bn (£100bn).
S&P, though, has concluded that this plan must be treated as a debt restructuring because investors would receive less value than was promised when they bought their original securities, and because without the deal Greece would almost certainly be unable to service its debts. "In our view, Greece's near-term reliance on European Union and International Monetary Fund official financing, the government's difficulty in reducing its sizable fiscal deficit, and the current pricing of Greek government debt in the secondary market all underscore the Hellenic Republic's weak creditworthiness and, consequently, point to a 'realistic possibility' that [the] financing option would fit the 'distressed' category," said S&P. Chaos could ripple through financial markets if the rating agencies rule that Greece has defaulted. Banks would have to slash the value of the Greek bonds they hold, and would probably not be able to use them as collateral with the European Central Bank (ECB). There are also fears that Portugal and Ireland might also see their credit rating cut. Gary Jenkins of Evolution Securities predicted that S&P's statement might scupper the FBF plan. "As the proposal not triggering a default was set as a precondition by the FBF it looks like it might be back to the drawing board. Or the ECB could back down and state that it will continue to accept defaulted bonds as collateral, and the FBF then ignores its own terms and conditions. We are in such strange and dangerous times that anything is possible," said Jenkins. "It might be that a completely different form of bailout has to take place, such as guaranteeing Greek debt or buying it back.
Anyhow, this is certainly a brave decision by S&P and it will be interesting to see how the other agencies follow and how senior officials at the EU react. Bet they wish they had gone ahead and set up their own rating agency now," he added. Analysts at ING said they were not startled by S&P's statement. "As a Fitch representative eloquently put it last week, "if it smells like a default it will be classed as a default"," they said in a research note.
Greece's immediate financial crisis was eased over the weekend when finance ministers agreed to hand over the next slice of its original bailout, worth €12bn. This followed the Greek parliament's approval of a tough five-year austerity plan designed to drive down Greece's budget deficit, giving international investors the confidence to lend to the country again. However, the meeting of eurozone ministers did not make significant progress on the pressing issue of the second bailout. "It is likely that this could well be delayed until September, given European leaders' predilection for delay," commented Michael Hewson of CMC Markets.