IMF's Greece Debt Idea Might Not Fly With Raters

Question of 'voluntary participation' will determine if they call it default

The International Monetary Fund (IMF) said Tuesday that it would consider extending the terms on existing Greek loans to give Athens more time to avoid default through restructuring. But earlier warnings by rating agencies that such a move might constitute default anyway continued to reverberate.

Reuters reported that the IMF is considering allowing Greece to take more time to repay its international loans, so that restructuring could be avoided. The effects of a restructuring would cause tumult throughout the euro zone, according to Bob Traa, the IMF's senior representative in Greece, who was quoted in the report. Such a move might not be accepted by ratings services, and instead could be classified as a default if they believe that bondholders feel coerced into granting more time to the beleaguered country to extricate itself from staggering debt.

European Union (EU) officials are floating the idea of a Vienna Initiative-style voluntary rollover. In that initiative, in 2009, credit lines to Eastern European subsidiary banks in Romania, Serbia, Latvia and Estonia were held open by parent banks who agreed to the arrangement.

However, Fitch Ratings and Moody's Investors Service both said that if bondholders participated in a similar arrangement with Greece because they feared the consequences, not because they were truly willing, the arrangement would nonetheless be classified as a default. Such a classification could send markets tumbling and cause other weak euro zone countries to be further downgraded; these effects would defeat the purpose of allowing Greece to roll over its debt.

David Riley, Fitch's managing director of sovereign and international public finance, said in the report, "In the case of Greece sovereign bonds, it is difficult to know how a Vienna II initiative could work which was genuinely voluntary and were to generate a significant participation. If they agreed to a rollover on existing terms, given that clearly the market would demand different terms for any new lending, that would be problematic in terms of being considered genuinely voluntary and not a distressed debt exchange."

Moody's concurred with this assessment, saying in a statement, "Vienna-style initiatives purport to be genuinely voluntary. Moody's would seek to assess, both before and after the event, whether that was in fact so. If we concluded that there was an element of compulsion, we would very likely class this as a default." The rater added, "Compulsion would be defined very broadly to include circumstances where the lenders believed that absent a continuation of lending or extension of maturities, default would have occurred."

In a report it issued Friday, Standard & Poor's said, "In situations where investors consider a default to be possible and where the rating has fallen, it becomes more difficult to conclude that investors are exchanging securities voluntarily. For example, while an exchange offer for longer-dated bonds may appear to be 'voluntary,' we may conclude that investors have been pressured into accepting because they fear more-adverse consequences were they to decline the exchange offer."

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