Greece heads to another EU summit this week on fresh aid for its debt-wracked economy after evoking – before pulling back – the thorny notion of a selective default that could unleash a eurozone storm.
The term is understood to mean a pick-and-choose approach to a country’s maturing debt, with a government arranging to delay repayment on certain obligations while continuing to fully honour others.
But to many investors, and more importantly to credit rating agencies that have already demoted Greece’s bonds to junk status, these are just semantics.
A French plan for private banks to rollover Greek government bonds as they came due was effectively shot down this month when ratings agency Standard and Poor’s said that such an arrangement would be tantamount to default.
Fellow evaluator Fitch last week also warned that “private sector involvement would likely be viewed as a sign of sovereign credit impairment and could trigger a rating default event”.
European officials have sought to square the circle and lighten Greece’s crushing repayments timetable on its €350 billion debt without triggering a horror scenario that could have unforeseen consequences for the troubled eurozone.
The Dutch finance minister broke the ice last week by revealing that the 17 eurozone ministers “did not exclude” the notion during talks in Brussels.
He was swiftly overruled by colleagues, but later statements by the Belgian finance minister showed that the EU is still trying to tiptoe around the issue.
“There needs to be an absolutely voluntary (private sector) participation so that it is not seen as a default,” he told AFP on Saturday.
Greece itself seems torn on the issue, with its finance minister appearing to downplay the dangers before Prime Minister George Papandreou stepped in to condemn “wordplay” on the matter.
“The word selective default scares without reason,” Finance Minister Evangelos Venizelos told reporters after Tuesday’s Eurogroup ministerial summit.
“It is not a real event, it is not default. It is an evaluation by the three familiar rating agencies,” he said, meaning Fitch, Moody’s and Standard and Poor’s.
“It does not on its own create a reality, nor does it activate the notorious CDS mechanism,” Venizelos said, referring to credit default swaps that have gained in value in expectation of Greek insolvency.
“If we are calm and wise, if we have a plan and apply it, we can manage anything to our benefit, because all this ultimately leads to a more viable debt... all this is done to provide a solution,” the minister said.
Main opposition leader Antonis Samaras swiftly chastised Venizelos for even bringing up the issue of selective default.
“Just uttering the term could have disastrous results... and this is true for all its variants,” Samaras said.