Most top credit rating agencies said yesterday they would not cut Greece’s rating to default if it misses a payment to the International Monetary Fund or European Central Bank, a stance that could keep vital ECB funding flowing into the financial system.
Greece owes nearly €1 billion to the IMF this month and almost €7 billion to the ECB over July and August and there are concerns that the govern-ment, stuck in funding talks with official lenders, will miss the payments.
This would be an unprecedented move that could put Athens’ future in the euro in doubt and has raised questions about whether it could set off a chain reaction, possibly accelerating repayments due to other official and private sector creditors and compounding Greece’s problems.
But for most rating firms, whose views determine whether the ECB can still accept sovereign Greek securities as collateral for lending to its banks, a missed IMF payment would not lead them label the country in default.
This is critical to keeping the life-support mechanism, the ELA emergency cash provided by the Greek central bank with the blessing of the ECB, flowing to banks because the ECB would not accept any securities issued by a government in default.
Greece owes nearly €1 billion to the IMF this month and €7 billion to the ECB
Standard and Poor’s, Fitch and DBRS, three of the top four, all say that as the IMF and ECB are not standard creditors, a missed payment to either, although likely to push Greece’s rating even deeper into junk, would not be classed as a default.
“If Greece were, for whatever reason, not to make a payment to the IMF or ECB that would not constitute a default under our criteria as it is ‘official’ sector debt,” said Frank Gill, who rates Greece for S&P.
As was seen during Greece’s massive 2012 debt restructuring, only when all four of the main agencies – Moody’s is the other one – declared Athens in default, did the ECB say it would not accept Greek bonds as ELA collateral.
Even then it did a quick U-turn after eurozone countries put €35 billion into an escrow account to cover the central bank in case there were any problems during the restructuring. Fitch’s Ed Parker and Fergus McCormick, head of sovereign ratings at DBRS both say their firms hold the same view as S&P.
Moody’s also agrees with them on a missed IMF payment but differs on the ECB. Its top eurozone analyst, Dietmar Hornung, says that not paying the ECB would be a default as the bonds it holds are potentially marketable and so could be looked on as the same as any other marketable debt.
Even though the ratings agency might not declare a default after a missed IMF or ECB payment, the International Swaps and Derivatives Association (ISDA) committees, which are run by banks and other bonds holders, could decide to do so which could trigger payouts on Credit Default Swaps and ‘cross defaults’ on other bonds.
Nevertheless, the risk of automatic ‘cross defaults’ from a missed payment to the IMF or ECB to other public and private sector Greek debts appears minimal according to legal experts.
The only potential impact Allen & Overy’s Yannis Manuelides saw from any missed payments was that they could technically give the European Financial Stability Facility (EFSF) the option to demand immediate repayment of one of its big Greek loans.