A French scheme involving private lenders in a second rescue package for Greece would "likely" amount to a default in the eyes of leading credit rating agency Standard & Poor's, it stated on Monday, in a blow to European efforts to avoid that assessment. "It is our view that each of the two financing options described in the (French) proposal would likely amount to a default under our criteria," the London-based agency said in a statement.
Such a finding would precipitate a banking crisis, since the European Central Bank has warned that it would then stop accepting Greek bonds as collateral for loans to Greek private banks.
The European Union and International Monetary Fund (IMF) are currently preparing Greece's new bailout - it needs up to 120 billion euros (174 billion dollars) to remain solvent beyond 2012 - after its parliament last week approved prerequisite austerity measures.
Germany and other bailout-weary governments have insisted that the private sector share in the risk this time, unlike in the case of the first 110-billion-euro rescue package.
Under the French proposal, financial institutions would receive new Greek 30-year bonds - representing about 70 per cent of their original holdings - in lieu of debt set for repayment in the short term.
That would give Greece more time to repay its loans, taking some of the pressure off of its troubled economy. The remaining 30 per cent of the debt's value would be paid as cash when the bonds mature.
Banks and insurance companies in France and Germany are among the major investors in Greek debt.
German financial institutions also on Thursday agreed in principle with that country's government to roll over Greek debt under a formula modelled on the French plan, but modified to suit Germany.
Standard & Poor's, however, deemed that the general approach would not lower the risk of Greece going bankrupt in the future and lead investors to receive "less value" than originally promised - thus meeting its criteria for a default.
"Greece's near-term reliance on EU/IMF 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," it said.
It, however, also noted that the French proposal is still being worked on and is "just one" of several approaches being considered.
"We understand that the ... proposal may change, and it is possible that it could take a form that results in a different rating outcome," Standard & Poor's said.
A spokesman for EU Economy Commissioner Olli Rehn on Monday declined to comment on the credit rating agency's findings.
EU finance ministers are expected to "clarify the outline" of the next Greek bailout when they meet on July 11, including the issue of private lenders, he said.
"The precise modalities and scale of private sector involvement... will be determined in the coming weeks," EU spokesman Amadeu Altafaj told reporters in Brussels.
"Exploratory talks have been taking place in Europe. But it's not one size fits all."
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