‘No default’ if Greece misses debt payments

Most top credit rating agencies say they would not cut Greece’s rating to default if it misses a payment to the IMF or ECB, a stance that could keep vital ECB funding flowing into the financial system. 

Greece owes nearly €1bn to the IMF this month and almost €7bn to the ECB over July and August and there are concerns 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.

However, for most rating firms, whose views determine if the ECB can still accept sovereign Greek securities as collateral for lending to its banks, a missed IMF payment would not lead them to label the country in default.

This is critical to keeping the life-support mechanism, the emergency liquidity assistance 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 declared Athens in default, did the ECB say it would not accept Greek bonds as emergency liquidity assistance collateral. Moody’s is the other agency.

Even then it did a quick U-turn after eurozone countries put €35bn into an escrow account to cover the central bank in case there were any problems during the restructuring.

Moody’s also agrees with them on a missed IMF payment but differs on the ECB. Its top eurozone analyst, Dietmar Hornung, says 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.

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