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Commercial lending to Greece may result in default

Credit ratings agencies have warned that private investments in Greece seen as involuntary will resu

EU finance ministers agreed on a bail-out package for Greece on Sunday, but the 100bn euros of aid from the EU and the IMF will also consist of substantial contribution from private investors.

"It is absolutely clear that no pressure will be put on the financial institutions, so as to avoid a Greek selective default. Voluntary means voluntary," said Luxembourg Prime Minister Jean-Claude Juncker, chairman of the meetings with the 17 eurozone finance ministers regarding the aid package.

Many believe voluntary does not mean voluntary. They feel extensions of loans by commercial lenders would be a result of political pressure too great to overcome.

Fitch credit ratings agency has announced that any roll overs of loans to Greece by these lenders will force them to pronounce the country to be in a default.

If Greece is declared a borrower in default, it would mean immense losses for European banks holding Greek debt, including the European Central Bank.

As lenders have already been warned that they will not get back the value- or even close to the value- of their original loan, further downgrade would be disastrous for Greek shares. There would be massive sales as many investors would be forcibly removed from the market due to the heightened risk.

Other agencies, such as Standard & Poor's and Moody's, have threatened default as well. Moody's credit rating for Greece warns investors of a 50 per cent chance of the country reneging on payment within three to five years.

The Greek government is currently undergoing a confidence vote in an effort to secure the first 12bn euros of aid from the EU and the IMF. If they make it through the vote, they will need to pass 28bn euros worth of spending cuts by 28 June to receive the aid.

These cuts, along with cuts in benefits and public sector salaries and pensions, have resulted in riots all over the country.

Even if Greece obtains the 12bn euro loan, it will soon require the rest of 100bn euro aid package.

Support from private investors is necessary to ensure the size of the package, but any contribution deemed "involuntary" will result in a default that will cause harm to the country that will resonate though the entire eurozone.