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

The French plan, discussed at a high-level meeting in Rome this week, has resulted in confidence that Credit Default Swap (CDS) markets would give it their thumbs-up, a derivatives expert with knowledge of the talks said.

It is not rocket science for a lawyer to figure out that a debt exchange won't trigger a credit event, the source told Reuters.

Politicians are adamant a Greek bail-out can only work if it avoids a so-called credit event that would trigger a pay-out of CDS, derivatives designed to hedge against a sovereign default.

(The plan) will be seen to comfortably not trigger the CDS ... the issues with the rating agencies and accounting are far bigger, the person said.

Banks have also received positive signals from ratings agencies that they will not call the French plan a default, clearing a second important hurdle that could have scuppered the debt renewal plan.

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 now being discussed in Germany too.

Brussels is insisting that banks and insurers take part in the planned second bailout package for Greece, facing rising pressure in countries including Germany, Finland and the Netherlands to share the burden with taxpayers.

Reassurances from market players that a debt roll-over will not trigger the CDS is a crucial step and would send a strong signal that banks are taking part without coercion. This is seen as essential to avoiding a knock-on impact on other markets.

The International Swaps and Derivatives Association (ISDA) is the independent market organization that decides on what constitutes a credit event, through a committee made up of 10 sell- and buy-side market participants.

Despite the optimism in Rome, ISDA's make-up means the outcome of its decisions are always subject to uncertainty, the source said. ISDA was present as an unofficial observer at the meeting, but the rating agencies did not attend.

(Editing by Alexander Smith)

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