A Guide to the New Deal in Athens: How a 'Selective Default' Works

Q:Thursday's deal by euro-zone leaders means Greece is likely to be declared in "selective default" by credit-rating firms. What does this mean?
A: It's a technical assessment that means investors in some Greek bonds will be worse off as a result of the deal. It implies holders of other bonds are still being repaid in full and on time.
Q:How significant is it?
A: Most selective default ratings last only a short time. Euro-zone leaders are hoping the deal, which reduces Greece's debt burden and provides more official loans, will convince credit raters that chances of full repayment on remaining debt are improved.
Q:But euro-zone leaders spent months fighting selective default, worrying investors might fear other countries could go down the same default path. Isn't that still a concern?
A: That depends on financial markets. Euro-zone leaders have done what they can to paint Greece as a special case—indeed, its debt is by far the highest as a proportion of annual economic output of any euro-zone country—and to emphasize that other governments will pay their debts in full and on time. They have also provided the euro-zone bailout funds with new tools aimed at preventing others from sliding into debt difficulties.
Q:The European Central Bank has been arguing it won't accept defaulted bonds as collateral for its loans. That would have threatened Greek banks, which it has propped up with tens of billions of euros of loans.
A: ECB President Jean-Claude Trichet got euro-zone governments to agree they would indemnify the ECB for losses of up to €35 billion ($50 billion) if collateral proved inadequate. It looks as if Greek bonds will, as a result, still be acceptable at the ECB.
Q:There has been concern about a "credit event" that could trigger payouts on credit default swaps, a type of insurance against default. Will this happen?
A: Probably not. The deal for private-sector contributions is voluntary. If a deal doesn't bind all bondholders, it's unlikely to be considered a credit event.
Q:What use is default insurance if there's a default and no payouts?
A: Good question. It may lead to some soul-searching in the CDS market.
—Stephen Fidler