July 5th, 2011
11:31 PM GMT
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(CNN) – When is a 'selective default' a default?

Seems like a silly question but it's giving a lot of banks, euro officials, European Central Bank governors, ratings agencies and yes, us mere journalists, a real headache. I'm still trying to figure this all out, but I will give it a go.

We all know Greece can't pay its bills. Giving it more loans and a longer time to pay it all back might give Greece some breathing room, but it means Greece will only have to pay even more money in the long run.

You still have to pick up the can, even if you "kick it" further down the road.

To avoid that, Greece could default, becoming the first Western country in decades to do so, and therefore start again.

Enough big minds say that would be so bad for the world economy - "Worse than Lehman's," we keep hearing - that it seems now that it won't happen.

So then what? In comes the immensely complicated French plan that would see the banks "voluntarily" give Greece another 30 years to pay back half the debt owed to them, from 5.5 percent to 8 percent, apparently.

Therein lies the problem, says the ratings agencies, these private firms that rate the solvency of everything from small U.S. town bonds to build a school to the loan books of international banks and the sovereigns issued by countries.

Greece is currently at the bottom of the rung with a junk rating. Or so it seemed to be the bottom rung - there is one more step below - "SD," which means "Selective Default."

Countries have been SD before - I read it can be technically for no more than a day. But what will happen if Greece goes to this rating?

Standard & Poor's says, well, if the banks take this voluntary deal then Greece is SD.

If Greece is SD then can the European Central Bank continue to take in Greek bonds from private banks as collateral in order to loan money back to the banks? No collateral then no loans, no loans then the banks are in real trouble. Think about Greek banks, with 100bn Euros in Greek bonds, unable to get money from the ECB.

Imagine what this would do to the so-called "stress tests" European banks need to pass again.

The ECB is apparently playing this scenario down; it has four ratings agencies it looks at and will take the highest rating on Greek debt from any of the four and so far only S&P has used the SD term.

Yet Moody's jumped in on Tuesday and said if the banks take this deal, then they may have to write down the value of the bonds on the books, a so-called "impairment charge."

Stay with me.

So, banks can't be "forced" to write down Greek debt, because that would be a straight-up obvious default, at which point all bets are off.

Instead they are being "persuaded" to do it voluntarily, and yet they may still get smacked around by the ratings agencies - the same ratings agencies still being heavily criticized for happily going along with the credit bubble that burst in 2008.

Now they are leading the charge against what seems to be a euro fudge - help Greece default without calling it a default in order to keep the ECB happy and not unleash unintended consequences.

 



soundoff (22 Responses)
  1. power4things

    When you do this, you're a "deadbeat". Countries have better names for it

    July 6, 2011 at 8:06 am |
  2. Lonny

    Poor Greece. Now is a great time to invest.

    July 6, 2011 at 9:42 am |
  3. PJB

    What's worse than junk? Can you say: "Indebted servitude"?
    Iceland refused the vampire-squid blood and they are back on their feet after having been raped and pillaged by the international financiers. Greece fell pray to GS and friends as did Ireland and the other PIIGS.
    You can never get out of a hole if you keep digging deeper. Stop allowing speculation by the bankers. They will own you lock, stock and barrel and then your kids will have your debts to pay....

    July 6, 2011 at 11:00 am |
  4. Steve Thompson

    It is becoming increasingly apparent that the developed nations of the world, including Greece and the other PIIGS nations, are the ones responsible for amassing unsustainable levels of sovereign debt. This is in complete contrast to the 1970s and 1980s when the so-called "third world nations" were responsible for debt default after debt default.

    Here is a summary of the $34 trillion sovereign debt of the world:

    http://viableopposition.blogspot.com/2011/04/debtworld-were-drowning-in-sea-of-debt.html

    Which debtor nation is going to bail out the next debt casualty?

    July 6, 2011 at 12:43 pm |
  5. Max360

    The Same ratings agencies that Suggested the US Lehman brothers was a great investment and US subprime mortgaged deserved Triple A Ratings even just before it all collapsed. The Same Ratings Agencies that still Give the US Government with it`s monstrous quickly growing 14 Trillion Debt Triple A Ratings! And having 43 US States in massive Financial trouble of their own. NO! You have Got to be kidding us. The only Question we are people at these agencies going to Jail for what they have done and are still doing. How much money are they actually making of these corrupt practices.

    July 6, 2011 at 1:10 pm |
  6. europeanCitezenX

    what's worse than junk?
    well American junk
    if Greece falls, by many accounts, it would cause a chain effect that would bankrupt some "too big to fail" banks on both sides of the Atlantic, which would have devastating effects on the US bonds (not to mention the European ones across the board)
    and this would lead to a global financial melt-down
    as I hear it

    July 6, 2011 at 1:45 pm |
  7. charis

    The ones who give the money have also an opinion that we better not ignore.

    A> Greece has huge reserves for OIL and GAS. They say it is something that can cover the needs of Europe for 30 to 50 years. This is something that is actually known for years but kept secret because of geopolitical games. It seems there is consensus now that these reserves will be opened.
    B> Greece has recently developed (besides the sizable Olympic games infrastructure) huge roads (Egnantia etc) Metro and other infrastructure that has certainly contributed to the escalation of the dept but with capability to accelerate further economic growth.
    C> The particular government that has ruled the country the last 2 years are actually the ones who brought the country close to default due to incompetency or as many say due to "insider trading" practices. ie they lead the country to an unpredictable to others position so that they can benefit from betting to that unforeseen to the others' position.

    Any of the 3 reasons above alone can explain why things have become complicated for the journalists to apprehend.
    Therefore even if the lenders are not always very vocal as regards explaining why they put their money in Greece we better not consider them be idiots. They simply know something they don't want to share with the general public. Maybe they also like seeing us scratch our head to understand their moves.

    July 6, 2011 at 1:48 pm |
  8. Sean

    Should I start buying holiday homes in Greece?

    July 6, 2011 at 2:09 pm |
  9. SoothSayer

    Greece will default in one form or another. The Eur/Usd pair will be €0.88 as a result of any default. This currency rate will drop to that level within days to weeks as soon as it is announced. Example: [insert favorite newspaper name] headlines print> " Breaking News! Greece Defaults!" Widespread panic in EU, citizens make a run on the banks. Doors closed. Violence in the streets. People hording money under matress. Commerce at a standstill. Many underpants soiled due to shock and awe. Citizens screaming,"my walls are bleeding!" Then after a few weeks life is back to normal as we all have become used to it and we get back on track and we don't allow this to happen again. But only after Spain, Portugal, Ireland and Italy also default.

    July 6, 2011 at 3:39 pm |
  10. Georgy

    Now more scumbag Greek politicians and their associates will invest in the property market buying repossessed homes from the poor for more profits. This is what they are waiting for. They create the perfect climate to catch big bucks.

    July 6, 2011 at 3:40 pm |
  11. Georgy

    CNN don't be bias pls, don't take sides. People have the right to express their opinion in an honest way. Publish my comments as they are. Thank you

    July 6, 2011 at 3:45 pm |
  12. Lucke

    Beware of the Greeks if you see a trojan horse ahead...

    July 6, 2011 at 4:01 pm |
  13. Michal

    It is quite obvious that all that is happening in Greece now is reallocation of debt. Greece is not able to pay its bills and instead of the creditors being hit by it like they would in a normal capitalist economy, the debt is being reallocated to the EU taxpayer (ECB taking over the Greek debt from the banks).

    The real reason the whole situation threatens EU economy so much is the politicians who try to minimise the impact this is going to have on the banks balance sheets by making everyone else pay for it.

    July 6, 2011 at 4:10 pm |
  14. lalala

    in somewhat forgotten times; if a country, kingdom, state, etc; stopped paying its debts; the countires, states, empires that loaned them, would either enslave the population until they had enough; got hold of mayor industries or portions of the country to make them selves get payed. This is no different than what is done today 1. enslaving the people of greece for years to come. 2. getting hold of their industries, or territories by investing in them with very low payments to Greece.

    July 6, 2011 at 4:53 pm |
  15. Stamatina Tsoukas

    Mr. Bouldon whatever everybody has to sale inside there heart we will sale them to the world. I feel sorry for the higher countries with authority where economy shut them to the ground and sold all there imports and exports to China. Next time in your comments I would be very cautious to what you say because were all in jeapordy, Leave Greece out of the picture and consitrate in this big country America where Im afraid to open my front doors because you dont know what crime & shootings happen daily without notice. Im very proud to be born Greek ( JUNK ) is what this country uses a lot with other bad words the number one in the whole world. Greece is the eye of the world we have culture , History , and good spirit from the Ancient Greeks as everybody around us very much knows but forget . If Greece disappears every planet will dissapear with us. Dont forget one day Europe will be united and stronger Empire will be built.

    July 6, 2011 at 5:33 pm |
  16. Lauro Silva Brazil

    Nothing will be successful with the infamous speculation coming to the fore. Cut government spending, clamp down corruption, to improve the budget and allow a reduction in taxes. Final consumer price will be reduced,production will be increased and new jobs will appear. Unfortunately none of this pleases the leaders and all will be engulfed by the disaster.

    July 6, 2011 at 6:27 pm |
  17. Victorianism

    Greece, default now! It is the best result for the people and the nation to go out of this mess. But the Greece's authorities will not make decisions based on the welfare of the general population but on their own benefits. Under the circumstance, the politicians are very likely to kick the can down the road with an ever-increasing interest-accumulating debt till the worst bankruptcy falls down to the Greek populace. It's sad to watch a big nation sinking down this way. The interests from the bailout and others combined are just too big to be bearable for the Greece's current continuously shrinking economy.

    July 6, 2011 at 11:07 pm |
  18. Paul Johnston, PhD Economics

    Greece is a INVESTOR HUGE RISK and a bad joke! They never belonged in the EU because they lied in the beginning and should default now and go back to the Drachma. Ridiculous giving them more assistance when they will NEVER pay it back. HUGE RISK

    July 7, 2011 at 5:37 am |
  19. Paul Johnston, PhD Economics

    IMPORTANT! - READ this From The International Herald Tribune & Kathimerini Greek News – Thursday Jul 7, 2011

    "Graft & Corruption still rife in Greece"

    http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_06/07/2011_397361

    The Greek state official in charge of keeping an eye on public services for cases of graft has expressed concern about lax procedures and enduring corruption in his annual report, delivered on Wednesday to Prime Minister George Papandreou.
    In his report for 2009, the country’s general inspector of public administration, Leandros Rakintzis, notes that bureaucracy and inefficiency continue to burden Greece’s public administration - with the court system still woefully unable to dispense justice - and that the system continues to feed unaccountability and corruption.
    “The slow dispensation of justice and the inadequacy of the courts in imposing the law, particularly in the case of financial crimes where many get away behind the shield of the statute of limitations, as well as the discreet handling of high-profile personalities, have created a sense of impunity among offenders,” Rakintzis wrote.
    According to the report, many tax offices showed laxness in checking and collecting outstanding debts. Often, orders to seize the assets of tax evaders and to inspect forged invoices were not carried out, the report noted, adding that illegal value-added tax returns to farmers and for exports had cost the state dearly.
    In total, 29 civil servants were suspended in 2009 while 398 cases were forwarded to a prosecutor following 4,199 inspections.
    In the case of declarations of source of wealth (known as “pothen esches”), 18 members of the state labor inspectorate (a third of the staff) did not even submit them, according to the report which noted a similar trend in other state bodies.
    Another problem highlighted by Rakintzis is the sluggishness of Greece’s public administration when it comes to implementing new laws. For example, reforms introduced to open up the road haulage sector are said to have remained on paper.
    Rakintzis said that the excessively high cost of procuring licenses effectively shut aspiring truck drivers out of the market. Charges range from 94,000 euros for a truck with a “common cargo” to 192,000 euros for a truck carrying fuel products. “Demanding such large fees basically prohibits new professionals from entering the road haulage profession,” Rakintzis said.

    July 7, 2011 at 5:39 am |
  20. CraigNL

    Europe, DITCH THE P.I.G.S. NOW!!!

    July 11, 2011 at 6:53 pm |
  21. Anna

    @Sean, firstly you could start by bying some consciousness
    It's all well set up when the media and governors try to make the impression that the Greek ppl "had it comin" and deserved what they (we) are dealing with now, so that you dont think you re being inhuman when you hear about a disaster for so many people and their kids -and their kids to come- and all you say is "Is it the chance opf my life to buy a holiday home in such a great resort?".
    You see...you wouldn't ever DARE to make such a question if we were talking about Puket islands. But, now, they try to make it look as if its not a financial crisis of THE BANKS and CAPITALISM, but of "people" ino general. Which is not true! The vast majority of grek ppl work more than french, german etc, and as the rest of the working class of all coutries, DO NOT take part in the PROFITS of the bosses. So now, WHY should they pay for the costs?
    We didnt get to share the profits, now we shouldnt be asked to take all the costs on our shoulders

    July 18, 2011 at 1:42 pm |
  22. icon downloads

    You are mistaken. I suggest it to discuss.

    October 5, 2012 at 7:08 am |

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