European finance chiefs begin the final stage of hammering out aGreek rescue to prevent the euro area's first sovereign defaultafter the country was slapped with the world's lowest credit ratingby Standard & Poor's.

Yields on 10-year Greek bonds climbed to a euro-era record of17.12 percent today before an emergency session of financeministers in Brussels. They're seeking to narrow differences on howinvestors share the cost of easing Europe's biggest debt burden andto wrap up a new financing plan at a leaders' summit on June 23-24,a year after Greece received a first bailout.

“The market is placing much too high a probability on thispossibility that Greece will default imminently,” Peter Westaway,chief European economist at Nomura International Plc, said today onBloomberg Television's “First Look.” “Policy makers just aren'tgoing to let Greece default. It's completely fanciful to think thisis going to happen.”

S&P said yesterday the nation is “increasingly likely” toface a debt restructuring, reflecting political pressure oninvestors not to dump Greek holdings. The cost to insure Greekdebt, the most expensive in the world, indicates a chance of aboutthree in four that Greece will default in the next five years. Thegovernment today sold 1.6 billion euros ($2.3 billion) of 26-weektreasury bills at a yield of 4.96 percent.

“Greece will default; it's a question of when, rather than if,”said Vincent Truglia, managing director at New York-based GraniteSprings Asset Management LLP and a former head of the sovereignrisk unit at Moody's. “It's a basic solvency issue rather than aliquidity issue. Only a debt writedown will do.”

S&P's Risks
The S&P cut to CCCfrom B reflects “our view that there is a significantly higherlikelihood of one or more defaults,” the rating company said.“Risks for the implementation of Greece's EU/IMF borrowing programare rising, given Greece's increased financing needs and ongoinginternal political disagreements surrounding the policy conditionsrequired.”

While the European Central Bank has said it could accept a planin which creditors voluntarily agree to buy Greek bonds to replacematuring debt, the monetary policy makers have warned against aGerman proposal that maturities on Greek debt be extended for sevenyears, an outcome that rating companies said would be considered adefault.

'Very Determined'
“The very determinedattitude of the ECB is what makes the involvement of the privatesector so explosive,” Commerzbank AG analyst Lutz Karpowitz saidtoday in a note.

The yield difference, or spread, between 10-year German bundsand Greek securities of a similar maturity widened to a record1,413 basis points.

No other sovereign nation is graded as low as CCC by S&P, aspokesman said by e-mail. Moody Investors Service cut its rating onGreece to Caa1 on June 1, leaving only Ecuador as a worse sovereignrisk. Not all countries' debts are rated.

“The rating agencies are now playing catch-up with the market,”said Gianluca Salford, a fixed-income strategist at JP Morgan inLondon. “The market is pricing in a very high probability thatthere will be a credit event around Greece. The agencies are justcatching up to the negativity that's already priced in by themarket, not the other way around.”

S&P also said it has a negative outlook on Greece'sdebt.

“Our negative outlook indicates that a downgrade to 'SD' couldoccur if Greece undertakes one or more debt restructurings ormaturity extensions on terms that constitute distressed debtexchanges as defined by our criteria,” S&P said. SD is a“selective default.” A restructuring would likely “result in one ormore defaults under our criteria,” it said.

Recovery Rating
S&P said that itsrecovery rating on Greece's debt is '4,' indicating it estimatesbondholders would recover 30 percent to 50 percent of theirinvestment.

A “financing gap has emerged in part because Greece's access tomarket financing in 2012 and possibly beyond, as envisaged in thecurrent official EU/IMF program, is unlikely to materialize,” thereport said.

Greece's Finance Ministry said in a statement that S&P'sdecision “ignores” the “intense consultations” to resolve thenation's crisis taking place between officials at the EuropeanCommission, ECB and International Monetary Fund.

“The decision by Standard and Poor's also neglects thedetermined efforts of the Greek government to avoid at any costsany possible violation of Greece's contractual obligations, and thestrong desire of the Greek people to plan for their future withinthe euro zone,” the statement said.

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