LONDON — A leading credit ratings agency warned on Monday that Greece would be considered to be in default if banks rolled over their holdings in the country's debt as proposed recently in a French plan.
Standard & Poor's said in a statement that two proposals by an association of French banks "would likely amount to a default" under its criteria because both options offer "less value than the promise of the original securities."
S&P's position could wreak havoc on Europe's attempts to deal with the Greek debt crisis, especially if rivals Moody's and Fitch come to the same conclusion. A so-called "selective default" could trigger insurance claims on Greek bonds and cause another bout of turmoil in the financial markets.
"A default is exactly what the European politicians want to avoid," said Louise Cooper, markets analyst at BGC Partners. "I imagine there are a lot of phone calls being made between the European political elite and the bosses at S&P."
The French banks had announced they were ready to help Greece by accepting a significant debt rollover as part of a second bailout for Greece. Germany's banks later said they were also considering helping out on similar terms.
French and German banks are among the biggest holders of Greek sovereign debt — €15 billion ($21 billion) and €16 billion ($23 billion) respectively, according to the Bank of International Settlements.
The French finance ministry and banks BNP Paribas and Credit Agricole would not comment Monday on the S&P warning but an EU spokesman insisted that a rating of "selective default" would have to be avoided. Amadeu Altafaj Tardio, spokesman for the EU's Monetary Affairs Commissioner Olli Rehn, said work on private sector involvement was ongoing and that there is no decision yet on its exact nature.
In Berlin, German Finance Ministry spokesman Martin Kotthaus said "We have to look carefully to see what model we can find to have as few side effects as possible."
A second bailout for Greece beyond the current €110 billion ($159 billion) package is currently being discussed in the hope of being completed by September. The Greek government has conceded that it will need more money to make bond repayments because it's not in a position to tap financial markets.
Rather than bearing the entire cost of a second bailout, European policymakers are looking at ways to get banks and other financail institutions involved.
One proposal sees them reinvesting at least 50 percent of their proceeds from maturing Greek government bonds in newly-issued 30-year Greek bonds, and another 20 percent in debt from other countries as a guarantee. The interest rate would be linked to Greece's economic growth and their trading would be restricted.
A second option being considered would see French financial institutions investing at least 90 percent of the proceeds of expiring Greek bonds in newly-issued five-year bonds. There would again be restrictions on their trading and the bonds would have the same interest rate formula as the 30-year issue.
The proposals received a fair degree of support, and appear to be the basis for a similar German plan for some €3.2 billion ($4.6 billion) in debt that is due for repayment by 2014.
Greece avoided a near-term default on its debts after its Parliament backed further austerity measures in return for more bailout money from international creditors.
Over the weekend, finance ministers from the eurozone agreed to release the vital installment of aid money for Greece but confirmed they will leave the final decision on a second bailout for the debt-ridden country until later this summer.
They agreed to sign off on an €8.7 billion ($12.6 billion) tranche of Greece's existing. An extra €3.3 billion will come from the IMF after its board's expected decision to authorize the payment in a meeting later this week.
Without the €12 billion ($17 billion), Greece would have defaulted on its massive debts within days.
The country needs tens of billions of euros in further assistance over the coming years, but ministers have delayed a second aid package until they know how much banks and other private creditors will contribute.
S&P's warning comes in the wake of last month's decision to slap a triple C rating on Greece — leaving Greece at the bottom of the pile of 131 countries the agency gives ratings to.
The other two major agencies Moody's and Fitch, which rate Greece moderately higher than S&P, have yet to pronouce on the French proposals.
No one at Moody's was available for comment but Paul Rawkins, a senior director at Fitch, said the proposals were "under scrutiny."
Angela Charlton in Paris, Gabriele Steinhauser in Brussels and Geir Moulson in Berlin contributed to this report.