Greek Fire, Part 38

As I mentioned this morning, Standard & Poor's sees either of the two bailout options open to Greece right now as default scenarios by their criteria.  That's bad news for European banks.

Standard & Poor’s said today a rollover plan serving as the basis for talks between investors and governments would qualify as a distressed exchange and prompt a “selective default” grade. That may leave the bondholders unwilling to complete the exchange and the European Central Bank unable to accept Greek government debt as collateral, impairing the lifeline it has provided the country’s banks.

“It sends all the officials and banks back to the drawing board to think of something new,” said Christoph Rieger, head of fixed-income strategy at Commerzbank AG in Frankfurt. “The ECB is saying it won’t accept debt in a default. Someone needs to give in -- either Germany or the ratings agencies or the ECB. One of three will have to compromise.” 

Ahh, but who will it be?  Germany's government is already on the brink with a majority of German voters against the Greek bailout efforts, so they can't pay any more.  The ECB has an awful lot of clout behind it as well but it's loaded up on bad PIIGS debts as it is, so they can't pay anymore.  And the ratings agencies aren't going to sign off on this deal and risk what little credibility they have left in saying Greek debt is AAA.

But somebody has to give.  The ratings agencies have called the ECB and Germany's bluff.  Somebody now has to eat this huge scheisseburger or the game's over and all three will lose.  Who will it be?  Not sure, but this means all that work and pressure the EU put on the Greek government to approve the next set of austerity/bailout measures is now moot.

Well, unless you're a Greek citizen...