One might argue that Greece technically defaulted when it could no longer borrow money from the capital markets to meet its obligations. Much like optimistic children who faithfully believe new sneakers make them run faster, the European Central Bank has engaged in fiscal gimmicks to delay the inevitable.
It would appear that the rating agencies have reached a similar conclusion, threatening to assign a default status to Greek debt if the ECB embraces a plan to roll over maturing bonds.
France built the Maginot Line during World War II, an impenetrable wall supported by heavy artillery and 15 percent of the French army. Despite their efforts, Adolf Hitler went around the wall and conquered Paris without much opposition.
The French find themselves in another awkward predicament, proposing that banks voluntarily roll over as much as 30 billion euros in Greek debt that comes due over the next three years into five- or 30-year securities.
Once again, their plan was foiled when Standard & Poor’s declared over the weekend that either option would constitute a selective default.
Lost in the irony is the fact that Standard and Poor’s is the least of their problems. To be sure, a default assessment by all major rating agencies would make Greek bonds ineligible for use as collateral at the ECB, an indelible buzz kill for version 2.0 of the bailout plan.
It’s important to note, however, that the I.S.D.A. determines which events trigger a credit default swap independent of the rating agencies, creating an entirely new set of concerns.
According to Markit, the gross exposure of a Greek default is estimated to be $78.7 billion, while exposure to the PIIGS totals $616 billion. Naturally, there are more exotic derivatives that cannot be accounted for.