The Rating Agencies Have Now Been Silenced: Off Balance Sheet MLEC-Style Debt Rollover Plan Will Not Trigger Events Of Default

Tyler Durden's picture

A few days ago, when we explained that the current iteration of the European bailout plan is nothing but a repeat of the failed MLEC off-balance sheet plan, which was supposed to prevent the subprime bubble from exploding, we wondered just why Europe has settled on this plan. Now we know: it appears that it was the rating agencies, arguably well-padded with $100 bills to compensate their collective conscience, who suggested that this is the only format of perpetuating the global ponzi without Greece being declared an Event of Dafault. Per Reuters: "The whole charm of the French model is that it was worked out in a such way that it will be fine with the rating agencies." There it is: expect headlines to slowly start leaking from S&P et al that the MLEC part deux will actually not be an Event of Default, and so Europe has the all clear to continue kicking the can down the road for several more years courtesy of money that is literally created out of thin air, and pledged by assets that no longer generate virtually any cash flows.

From Reuters:

Politicians and bankers are confident a French proposal for a Greek bailout can be adopted without triggering a default or a payout in credit insurance, lifting a key hurdle to a rollover of Greek debt, sources told Reuters.

Banks have received positive signals from rating agencies that they will not call a French rollover plan for Greek debt a default, three people close to German lenders said on Wednesday.

"The whole charm of the French model is that it was worked out in a such way that it will be fine with the rating agencies," one of the people said.

Another source said the fact the French model was developed by banks implies the rollover will be fully voluntary -- a precondition for rating agencies not to declare a default.

"It is not rocket science for a lawyer to figure out that a debt exchange won't trigger a credit event," a derivatives expert with knowledge of the talks said.

"(The French plan) will be seen to comfortably not trigger the CDS," he added.

However, a senior official at Standard & Poor's on Monday said it was too soon to judge the ratings impact of the discussed debt relief package.

"I can tell you only that we cannot give a judgment on something we have not even seen," Moritz Kraemer, S&P's head of European sovereign ratings, had said.

French banks, who have some of the largest holdings of Greek sovereign debt, have proposed voluntarily renewing part of the bonds when they fall due, but on different terms.

That proposal is being discussed in Germany, too, and sources close to the talks said details such as the volume of any rollover and the coupon payments of new bonds need to be finalized.

Joseph Ackerman, whose asset base is 84% of Germany's GDP, summarized it best:

The head of German market leader Deutsche Bank (DBKGn.DE), Josef Ackermann, said on Wednesday the financial industry is prepared to agree to sacrifices because a Greek default would be more dramatic than the crisis at investment bank Lehman in 2008.

"The solution for Greece must avoid the collapse of the entire system," said Ackermann, while pointing out the German proposal for a voluntary rollover of Greek debt would lead to 45 percent writedowns on the bank's entire portfolio.

And there you have it: the global ponzi will now continue, courtesy of the infinitely expandable EFSF and MLEC 2, in the form of one giant CDO and one massive off balance sheet SPV conduit, precisely the two things that led to the cratering of the financial system in the first place.