Most top credit rating agencies say 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 euros to the IMF in May and almost 7 billion euros to the ECB over July and August and there are concerns that the government, 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.
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 euro zone countries put 35 billion euros 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 euro zone 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. But as the EFSF is government controlled, that seems highly unlikely and it would most likely waive that option.
Still, failing to make the payments to the ECB and IMF — Fitch has said it “cannot be discounted” — would leave the ECB in a powerful position with regard to Greece.
Although it would probably not cut off Greek banks’ emergency funding completely, the ECB could raise the ‘haircuts’ or discounts applied to Greek government securities when they are used as collateral, reducing the amount of cash it will extend to Greek banks.
The average haircut on Greek ELA collateral is estimated to be around 35 percent although it can be smaller, particularly on government bonds with a few years left to run.
Increasing the haircut would leave Athens with less money, creating more pressure on Athens to seal a deal for more aid.
All four ratings agencies said missing the IMF or ECB payments would not be a good idea.
“Defaulting to the central bank that is propping up your banking system is not particularly prudent,” said S&P’s Gill.
“They would be more likely to default on their T-bills (than the ECB) the only problem is that they are then defaulting mostly on their own banks… and in any case a distressed exchange on T-bills would definitely be classed as a default.”