Rating agency Standard & Poor's has given a fresh warning about Greek debt despite a weekend deal, renewing unease on markets.
S&P warned that proposals floated by the French Bank Federation risked putting Greece into a selective default, a possibility with potential domino effects of deep concern to financial markets.
'It is our view that each of the two financing options described in the FBF proposal would likely amount to a default under our criteria,' a statement said.
On Saturday, euro zone finance ministers approved the next €12 billion slice of a rescue worth €110 billion provided in May last year by the European Union and International Monetary Fund. Release of the money was conditional on the Greek parliament's approving deep new budget measures, which it did last week.
But euro zone ministers pushed back an expected announcement over a second rescue package of about the same amount, possibly until September. Analysts said the delay was to enable them to ensure that ratings agencies would give any deal their stamp of approval.
In Brussels, European Commission spokesman Amadeu Altafaj said the commission hoped euro zone ministers would make progress on a second rescue at their next meeting on July 11, but that a few more weeks were needed to work out how private bondholders would take part.
Some governments, notably in Berlin, insist that private investors share the burden by agreeing to 'roll over' their Greek debt. But there is widespread concern that if the terms of a new rescue are judged to be equivalent to a default, damaging repercussions could sweep through euro zone and global markets.
The European Central Bank has warned that what it terms a 'credit event', referring to discriminatory treatment between holders of Greek debt, could lead it to end its own lifeline support for the Greek banking system. The ECB has supported Greece by buying huge amounts of its debt on the market, but has said it will not participate in any rollover.
There is also concern that a default situation could trigger strains in the market for credit default swaps, which act as insurance against default. A domino effect could severely weaken the balance sheets of some banks and insurance companies.
French banks hold a sizeable proportion of Greek debt, and France has proposed that lenders roll over their loans into new 30-year bonds, giving Greece more time to put its financial house in order. But the debt rollover proposal 'could result in a selective default for Greece', S&P said.
It also said that 'Greece's near-term reliance on EU/IMF official financing, the government's difficulty in reducing its sizeable fiscal deficit, and the current pricing of Greek government debt in the secondary market all underscore the Hellenic Republic's weak creditworthiness'. The agency has already lowered the long-term rating on Greek public debt to CCC from B.
The ECB, which is the biggest single holder of Greek public debt with about €47 billion worth of sovereign bonds, according to Deutsche Bank Global Markets Research, has warned meanwhile that it could not accept more debt as collateral for loans if Greece were declared to be in default.
That could throttle Greek commercial banks which now depend on ECB financing and undermine banks receiving similar ECB support in other debt-laden euro zone countries such as Ireland and Portugal.
The Institute of International Finance, an umbrella group for banks, insurers and investment managers, said its members might be willing to help a buyback of Greek debt, which would have the advantage of reducing the stock of Greek debt.
