So, has Greece defaulted?
No. But Standard & Poor's, the rating agency, has said it will do so if the German and French banks' plan to roll over Greek debt goes ahead. In that case, Greece would be rated as SD, "selective default". Its current rating is CCC, the lowest rating in the world.
Aren't these the same rating agencies that were discredited by the financial crisis?
Indeed. The agencies' reputations were damaged because of their persistently positive ratings of mortgage-backed securities and credit derivatives before the financial crisis. However, S&P, Moody's and Fitch – the big three – argue that their sovereign credit ratings are far more dependable. Even the International Monetary Fund tends to agree – it noted recently that in the past 35 years every country that defaulted was rated below investment grade for a year beforehand. S&P downgraded Greece to that level in April 2010.
So does S&P's warning of a possible Greek default matter?
Symbolically, it absolutely does. Were Greece to default, it would be the first developed country to do so since the end of the Second World War. But beyond the symbolism, the significance of a selective default rating is harder to judge. S&P itself says it would rate Greece as SD only for "a short time"; how long that would be is hard to say right now. Previously, countries have remained on SD for anywhere between a day and six months.
What is this rollover plan?
A rather impenetrable proposal, to be frank. Essentially, for every €100 ($145 U.S.) in bonds that an investor holds and that are maturing before mid-2014, the investor would receive €30 in cash. Greece would get the other €70 but would be obliged to spend €20 of it to buy high-quality collateral, which would guarantee the remaining €50. Investors would get 30-year bonds that would pay an interest rate of between 5.5 per cent and 8 per cent.
If Greece were to be in default for only a day or two under this plan, should we really care?
The European authorities are forcing us to be concerned. The European Central Bank has said it will not accept any collateral if it is rated in default. This is a huge deal for Greek banks, as they have about €100-billion of bonds that they exchange for ECB loans. Analysts warn that the Greek banking system could collapse if it could no longer rely on ECB support.
But it's not just the ECB. The French proposal for the rollover, endorsed in principle but not in every detail by German and other banks, is conditional on rating agencies not downgrading Greece or its bonds to default.
Euro zone finance ministers also said at the weekend that consultations were under way with creditors over a rollover "while avoiding selective default."
What do other rating agencies say?
Fitch, the third largest, has hinted it will also call a default; Moody's has kept relatively tight-lipped. A ratings downgrade, however, is separate to a so-called credit event, which is the trigger for credit default swaps, a type of insurance against defaults. Lawyers have indicated it is highly unlikely a rollover would be considered a credit event.
What is the way out of this mess?
One simple way is for the banks to lift their pre-condition for the rollover that there must not be a default. A knottier issue is the ECB's insistence on not taking default-rated collateral. One possibility is that although the rating for the issuer – in this case Greece – would be in default, the rating for an individual bond issued by Athens would not. That would give the ECB some wiggle room.
That still leaves the issue of whether the rollover would actually help Greece, or merely the banks. The latest euro zone mess does not help to convince markets that the European authorities have a plan to solve this crisis.