Greece would likely be in default if it follows a debt rollover plan pushed by French banks, S&P warned on Monday, deepening the pain of a bailout that one European official said will cost Athens sovereignty and jobs.
European politicians and bankers had expressed confidence last week that the French proposal would not trigger a default, but ratings agency Standard & Poor's said it would involve losses to debt holders, most likely earning Greece a selective default rating.
It is our view that each of the two financing options described in the (French banks') proposal would likely amount to a default under our criteria, S&P said.
French banks, major holders of Greek sovereign debt, proposed voluntarily renewing some of the bonds when they fall due, but on different terms.
S&P cut Greece's sovereign rating to CCC last month, from B, on a view that any restructuring of the country's massive debt load would count as an effective default.
The euro fell from around $1.4550 to a session low around $1.4510 after the latest S&P comment.
Derivatives industry body ISDA said before the French proposal was released in late June that a voluntary agreement to roll over Greek debt would typically not trigger payments on credit default swaps.
Greece was already facing an uphill struggle this week to start the process of selling off state-owned assets and reform its tax system to meet European Union and IMF conditions for bailing it out. The deep spending cuts required under the loan terms have sparked angry protests on the streets of Athens.
Eurogroup Chairman Jean-Claude Juncker said Greece will lose sovereignty and jobs to meet those criteria, a comment that has enraged unions. Any suggestion of foreign intervention in running the country is an incendiary political issue that will make implementing reforms even tougher.
Public-sector union ADEDY, which has launched crippling strikes and protests, reacted angrily to his comments.
ADEDY President Spyros Papaspyros said Juncker was out of line: Mr Juncker interferes in the internal affairs of a country, provokes European rules and is an embarrassment for the country whose government tolerates him.
Juncker's comments could trigger more of the anti-austerity street protests that have roiled the country for months as Greece stays stuck in its worst recession since the 1970s with a youth unemployment rate of more than 40 percent.
The sovereignty of Greece will be massively limited, Juncker told Germany's Focus magazine in an interview released on Sunday. Teams of experts from around the euro zone would be heading to Athens, he said.
One cannot be allowed to insult the Greeks. But one has to help them. They have said they are ready to accept expertise from the euro zone, Juncker said.
EASIER SAID THAN DONE
Greece last week passed austerity measures worth 28 billion euros ($40 billion) and promised to deliver 50 billion euros in sell-off revenues by 2015, including raising 5 billion euros by the end of this year alone. On the list are public utilities whose sale is sure to prompt public reaction.
Greece now needs to push faster fiscal adjustments and structural reforms, said EFG Eurobank economist Platon Monokroussos. On the privatization front, it is of essence the government delivers fast results to send a strong signal to financial markets.
That is easier said than done.
The socialist government, which came to power on a social welfare platform, has yet to launch a single state sale in 18 months in power and must set up a privatization agency within weeks to meet its target.
It must also start to sell state property, estimated at up to 300 billion euros but often entangled in legal complications.
The 50 billion euro target is not achievable, said Constantinos Mihalos, head of the Athens Chamber of Commerce. Share values are very low right now because of the recession.
At the same time, Greece needs to deliver on pledges to reform a chronically inefficient tax system that has relied too much on middle class salary earners and let wealthy tax evaders off the hook, producing disappointing revenues this year.
Finance Minister Evangelos Venizelos told Reuters in an interview on Friday that Greece would tap for the first time private-sector expertise but tax offices around the country are notoriously resistant to any change.
A greater effort is needed to rein in tax evasion and broaden the tax base in a bid to bring the ratio of revenues to GDP closer to euro area average and reduce expenditure and waste in the broader public sector, Monokroussos said.
Investors have feared that default by Greece would send shockwaves through the world finance system with some commentators saying such an eventuality could call the whole euro zone into question.
Another hurdle is the law on a uniform pay scale for the public sector, sure to cut further the salaries of civil servants who have already seen their pay reduced by an average 15 percent as a result of a wave of austerity measures to secure the 110-billion-euro bailout last year.
On Saturday, euro zone finance ministers approved a 12 billion euro loan Greece needs to avert default.
The IMF will meet on July 8 to approve the 12-billion euro loan tranche, which is expected to be handed over by July 15 and allow Greece to avoid the immediate threat of debt default.
But the country still needs the second rescue package, which is also expected to total around 110 billion. EU officials will now look at how private creditors can be involved voluntarily so that rating agencies do not declare the rescue a credit event.
(Additional reporting by Wayne Cole in Sydney)
(Writing by Dina Kyriakidou and Emily Kaiser; Editing by Louise Ireland, Peter Millership and Neil Fullick)