Greek aid package synonymous with default, says rating agency

There's no rest for the troubled Greek economy: The rating agency Standard & Poor’s said it would consider the latest proposals for restructuring the country’s massive debt as a default.

S&P’s announcement refers to the so-called Paris model, a proposal developed by French banks, to roll over Greece’s debt. According to the plan, private creditors would renew maturing Greek bonds on different terms. German banks have signaled they are prepared to join the scheme.

“It is our view, that the options described in the [French bank’s] proposal would likely amount to a default under our criteria,” S&P said in a statement.

Paradoxically these measures are designed to prevent a state default within the eurozone – a scenario Europe’s governments are frantically trying to avoid.

It was immense pressure from the European Union (and the International Monetary Fund) that forced the Greek government only last week to push another austerity plan through parliament in order to secure further financial help. While lawmakers debated spending cuts worth 28 billion euros ($40 billion), police had to use tear gas to disperse violent protests in the streets outside parliament.

There is a growing sense in Europe that a Greek default is unavoidable – and possibly not the catastrophe described by politicians.

"The Greek economy is small and certainly not systemically relevant for the eurozone,” says leading German economist Stefan Homburg, director of the Institute for Public Finances in Hanover. “The Russian insolvency in 1999, for example, was of much bigger proportions. It didn’t threaten the world financial system. The process leading to a Greek default is already irreversible.”

The European Central Bank (ECB) however seems determined to prevent such a consequence. According to the Financial Times newspaper, the ECB considers lending to Greece even if two of the three big rating agencies declare the country bankrupt. The bank already holds 100 billion euros ($145 billion) of Greek debts.

Yet there are even more hurdles ahead for Greece.

Germany’s Constitutional Court today began to hear a challenge to the country’s participation in all the current eurozone bailout packages – for Greece, Ireland, and Portugal.

A group of German economists argues that the aid measures for Greece and the European Financial Stability Facility – a temporary creation meant to deal with debt problems in eurozone countries other than Greece – violates the German constitution and the German people’s right of democratic representation in decisions as far-reaching as these.

“Pumping money into a bankrupt country like Greece and asking it to cut public spending has nothing to do with helping the economy,” says Prof. Joachim Starbatty, one of the plaintiffs. “It’s about bailing out banks that took a risky gamble with Greek bonds. The German finance minister can’t simply take German taxpayers’ money and spend it, throwing the European principle of subsidiarity out of the window.”

A court decision is expected in the autumn, and finance minister Wolfgang Schaeuble is convinced it will be in his favor. “We are absolutely certain: We did all things necessary to protect our common European currency,” Mr. Schaeuble told reporters outside the court in Karlsruhe.

But economist Homburg disagrees: “A Greek default is no threat to the euro. With a haircut, the Greek debt would fall from 150 to 75 percent. That’s currently Germany’s debt rate. But if we continue to bailout countries in the eurozone, everyone will throw financial discipline over board. And that could really bring the whole system down."