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 Greece owes nearly 1 billion euros to the IMF in May and almost 7
billion euros to the ECB over July and August and there are concerns
that the government, stuck in funding talks with official lenders,
will miss the payments.
This would be an unprecedented move that could put Athens' future in
the euro in doubt and has raised questions about whether it could
set off a chain reaction, possibly accelerating repayments due to
other official and private sector creditors and compounding Greece's
problems.
But for most rating firms, whose views determine whether the ECB can
still accept sovereign Greek securities as collateral for lending to
its banks, a missed IMF payment would not lead them label the
country in default.
This is critical to keeping the life-support mechanism, the ELA
emergency cash provided by the Greek central bank with the blessing
of the ECB, flowing to banks because the ECB would not accept any
securities issued by a government in default.
 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.
"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.
As was seen during Greece's massive 2012 debt restructuring, only
when all four of the main agencies -- Moody's is the other one --
declared Athens in default, did the ECB say it would not accept
Greek bonds as ELA collateral.
Even then it did a quick U-turn after euro zone countries put 35
billion euros into an escrow account to cover the central bank in
case there were any problems during the restructuring.
COLLATERAL DAMAGE
Fitch's Ed Parker and Fergus McCormick, head of sovereign ratings at
DBRS both say their firms hold the same view as S&P.
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.
Even though the ratings agency might not declare a default after a
missed IMF or ECB payment, the International Swaps and Derivatives
Association (ISDA) committees, which are run by banks and other
bonds holders, could decide to do so which could trigger payouts on
Credit Default Swaps and 'cross defaults' on other bonds.
Nevertheless, the risk of automatic 'cross defaults' from a missed
payment to the IMF or ECB to other public and private sector Greek
debts appears minimal according to legal experts.
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The only potential impact Allen & Overy's Yannis Manuelides saw from
any missed payments was that they could technically give the
European Financial Stability Facility (EFSF) the option to demand
immediate repayment of one of its big Greek loans. But as the EFSF
is government controlled, that seems highly unlikely and it would
most likely waive that option.
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.
Although it would probably not cut off Greek banks' emergency
funding completely, the ECB could raise the 'haircuts' or discounts
applied to Greek government securities when they are used as
collateral, reducing the amount of cash it will extend to Greek
banks.
The average haircut on Greek ELA collateral is estimated to be
around 35 percent although it can be smaller, particularly on
government bonds with a few years left to run.
Increasing the haircut would leave Athens with less money, creating
more pressure on Athens to seal a deal for more aid.
All four ratings agencies said missing the IMF or ECB payments would
not be a good idea.
"Defaulting to the central bank that is propping up your banking
system is not particularly prudent," said S&P's Gill.
"They would be more likely to default on their T-bills (than the
ECB) the only problem is that they are then defaulting mostly on
their own banks... and in any case a distressed exchange on T-bills
would definitely be classed as a default."
(Editing by Anna Willard)
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