PARIS/FRANKFURT (MNI) – Rating agencies will ultimately play a
pivotal role in crafting any plan for private creditor participation in
a second Greek bailout, even if they have not been involved in the early
stages of talks between bankers and Eurozone officials, banking and
rating agency sources told Market News International.

Rating agencies did not participate in a Rome meeting on Monday at
which a number of proposals were discussed, including a French plan to
roll over Greek debt for 30 years. And they have not so far been brought
into other discussions between national governments and their major
banks.

“The rating agencies did not participate in the meetings and have
not been asked to give any input as yet,” one rating agency official
said. He noted that the agencies will unlikely be involved in early
planing stages because, “governments want to avoid the impression of
making deals with us.”

However, governments are very much dependent on the judgment of the
agencies and will have to come up with private sector deal that does not
prompt a default or “selective default.”

The European Central Bank has warned repeatedly that if Greek debt
is downgraded to default status, it will no longer accepted as
collateral in the central bank’s refinancing operations. This would lead
to an immediate collapse of the Greek banking system, greatly
complicating rescue efforts.

That means that governments and banks have no choice but to get the
rating agencies’ stamp of approval before adopting any specific plan.
But that is hardly a new phenomenon.

“The links between the governments and rating agencies are actually
very, very close,” said one well-placed French banking source. He noted
that governments consulted closely with the rating agencies when
designing Europe’s bailout fund, the European Financial Stability
Facility.

“The EFSF was designed with the rating agencies, who said ‘this is
what will be accepted as AAA’ — and that’s what the governments did,”
this source noted. “I don’t think that many people realize that.”

In the current talks to find a private sector solution for Greece,
“anything that will be decided will be decided with the rating
agencies,” he added.

In this case, the maneuvering room of governments and banks is
likely to be limited, since all three major ratings agencies have said
that even the kind of “voluntary rollover” being considered could lead
to a downgrade to selective default status.

Given what is at stake, rating agencies may well face pressure from
authorities, the rating agency source speculated. “While this is not the
norm, in the past regulatory authorities have tried to exert pressure to
avoid downgrades of institutes under their supervision,” he noted. “It
is possible that governments will try to pressure agencies on this
issue.”

A major concern in the ongoing talks is how to get a significant
volume of voluntary rollovers when — from any rational financial or
political perspective — it may not make a lot of sense to invest in
Greece right now.

The banking source said that various types of incentives and
guarantees are being discussed to try to get banks to participate
without any hint of coercion. It emerged earlier this month that
Germany, Finland and the Netherlands were requesting collateral from
Greece. The German banks are still pushing that request.

Various ideas have been discussed, including Greece putting up
state assets as collateral, including property, gold, and even a
percentage of fees from public utilities or certain taxes, the banking
source said. So far, however, this is a non-starter, because Greek Prime
Minister George Papandreou has refused to agree, fearing it would
exacerbate an already volatile social and political situation.

Another idea for guaranteeing rolled-over Greek debt is contained
in a proposal made public by France on Monday. The French banks, in
collaboration with the French Treasury, are proposing to roll over 70%
of their Greek bond holdings. Of that, 50% would go into new Greek paper
with 30-year maturities. The remaining 20% would be used to purchase
high-quality bonds, which would serve as a kind of guarantee. It is
unclear whether the bonds would be guaranteed or even issued by the EFSF
— a controversial idea — or whether the banks’ proceeds themselves
would serve as the guarantee.

The plan was discussed in Rome on Monday by bankers and Treasury
officials from various Eurozone countries. According to numerous media
reports, the German banks objected to the length of the proposed
rollover and were more comfortable with a much shorter duration.

According to a news agency report, unnamed sources said the German
banks had accepted the French proposal “in principle” as a model on
which to build an agreement.

However, the Association of German Banks (BDB) said nothing has
been decided yet. “There are several options on the table [including]
the French model,” said Thomas Schlueter, a BDB spokesman.

“We have several options. We are looking at them and so far there
is no decision,” he added.

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