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No default if Greece Misses ECB, IMF Payments

Most top credit rating agencies (Standard & Poor's, Fitch and DBRS) say they would not cut Greece's rating to default if it misses a payment to the International Monetary Fund or European Central Bank, a stance that could keep vital ECB funding flowing into the financial system. 

Greece owes nearly €1 billion to the IMF in May and almost €7 billion to the ECB over July and August.  There are concerns that the government will miss the payments.

Standard and Poor's, Fitch and DBRS, three of the top four, all say that as the IMF and ECB are not standard creditors, a missed payment to either, although likely to push Greece's rating even deeper into junk, would not be classed as a default.

Why?  "If Greece were, for whatever reason, not to make a payment to the IMF or ECB that would not constitute a default under our criteria as it is 'official' sector debt," said Frank Gill, who rates Greece for S&P. Fitch and DBRS agreed with Standard & Poor's stand.  On the other hand, Moody's also agrees with them on a missed IMF payment but differs on the ECB. Its top euro zone analyst, Dietmar Hornung, says that not paying the ECB would be a default as the bonds it holds are potentially marketable and so could be looked on as the same as any other marketable debt.

Why is this important?  In 2012, during Greece's debt restructuring, ECB say it would not accept Greek Bonds as ELA collateral only when all four of the main agencies - Moody's is the other one - declared Athens in default.  In other words, if Greece were to be declared as default, the life-support mechanism to Greece will be cut off from ECB.

Thus, by not declaring Greece default should it miss payment to IMF and ECB would ensure the continual support from emergency funding for the government.  Still, failing to make the payments to the ECB and IMF -- Fitch has said it "cannot be discounted" -- would leave the ECB in a powerful position with regard to Greece. For instance, ECB could raise the "haircuts" or discounts (estimated to be around 35% though it can be smaller, particularly on government bonds with a few years left to run) applied to Greek government securities when they are used as collateral, reducing the amount of cash it will extend to Greek banks.  Increasing the haircut would leave Athens with less money, creating more pressure on Athens to seal a deal for more aid.

Reference:

Reuters, Marc Jones, 2015-05-01, "Ratings Agencies Say No Default If Greece Misses ECB, IMF Payments"