S&P dovish announcements reignite fears with eyes turning to second bailout for Greece

No sooner had European markets clamed down last week with the approval of the Greek austerity measures by the Greek Parliament and European Finance ministers than it returned to the jittery situation once again after the dovish Standard and Poor's announcements.

S&P halted optimism after it said it would consider rollover in Greek debt by private sector investors as a “selective default” rating.  The rating agency would give Greek debt a “D” rating temporarily till it assigns a new grade after the exchange.

Likewise, other rating agencies said it would deem voluntary participation in Greek debt as default which is putting the ECB in a difficult situation as it does not accept Greek government debt as collateral.

Last week, Trichet urged for “the avoidance of credit events or selective default or default,” where he did not comment on the French proposal that was welcomed by German officials.

According to the French President Nicolas Sarkozy the proposal would include the involvement of private sector investors in Greek debt through reinvesting half of the yields of maturing Greek bonds in new 30-year debt where they will get 5.5 percent interest in addition to a bonus linked to Greece's GDP growth rate in return.

By extension, the rest of the plan includes that 30 percent would be cashed out while 20 percent would be invested in zero-coupon AAA securities with deferred interest that will probably be backed by the euro zone rescue fund to stimulate banks, or the other option would be to reinvest not less than 90% of the maturing securities into new five-year bonds.

Yet, in both cases S&P said “it is our view that each of the two financing options described in the Federation Bancaire Francaise proposal would likely amount to a default.”

Now, the problem is that while Greece is prepared to receive 8.7 billion-euro by mid-July as fifth tranche of last year's 110 billion euro aid package after the approval of European finance ministers, the second bailout out remains in jeopardy in the case that Greece had “selective default” rating by rating agencies.

Euro area economies and private investors will probably finance 70% of the expected 85 billion euro second bailout while the IMF will fund the rest.

Meanwhile, the euro is traded lower against majors where it fell from 15-month high against the pound to 0.9015 after opening at 0.9045.