Time to think

S&P/Greek debt:  Nobody likes being told they are a poor credit. But Standard & Poor’s statement that current proposals for a Greek debt rollover would amount to a default could ultimately be good news for Greece.

S&P’s statement leaves little doubt that the current French proposal to roll over maturing Greek bonds into 30-year securities will not escape a rating default. That puts the plan on a collision course with the European Central Bank, which has said that it will not accept bonds from a defaulted issuer as collateral in its liquidity operations.

Still, it may not be all bad for Greece. For one, the French proposal brought Greece limited relief. It forced it to stash 30 per cent of funds raised in a low-yielding AAA-rated security designed to protect banks. Furthermore it tied Greece into making additional interest payments linked to its growth rate. Greece could have paid interest of up to 11.4 per cent on the proceeds it could use today, or double the rate it pays on official loans.

S&P’s statement may not completely put the kybosh on the French plan. If other ratings firms were to decide that it isn't a default, the ECB could simply ignore S&P. Alternatively, euro zone governments and banks could tweak the French proposal to satisfy S&P, by making the new bonds shorter. But that would mean a rollover at least as expensive for Greece as the current one.

The euro zone has two months to work out how to involve private creditors in Greece’s second bailout without triggering a default. But it would be better to accept that a ratings default is not the end of the world and push ahead with a simple rollover.

To do that, the ECB would need to be persuaded to go back on its threat to cut off Greek banks. One way could be to create a funding facility which does not leave the ECB exposed to losses, for example through a government indemnity.

If Europe comes round to the idea a ratings default, it may decide that a restructuring sooner rather than later would not be so damaging - if properly managed. S&P’s warning could be a turning point in the crisis. But the danger is that Europe wastes more time working out how to jump through ratings agency hoops rather than preparing for the inevitable.