Greece in temporary default says Fitch
Athens, July 23, 2011
Fitch ratings agency declared Greece would be in temporary default as the result of a second bailout, which Athens said had bought it breathing space.
But the agency pledged to give Greece a higher, "low speculative grade" after its bonds had been exchanged and said Athens now had some hope of tackling its debt mountain, which most economists still expect to force a deeper restructuring in the future, said a report in our sister publication, the Gulf Daily News.
An emergency summit of leaders of the 17-nation currency area agreed a second rescue package on Thursday with an extra 109 billion euros ($157 billion) of government money, plus a contribution by private sector bondholders estimated to total as much as 50 billion euros by mid-2014.
Under the bailout of Greece, which supplements a 110 billion euro rescue plan by the European Union and the International Monetary Fund in May last year, banks and insurers will voluntarily swap their Greek bonds for longer maturities at lower rates.
"Fitch considers the nature of private sector involvement... to constitute a restricted default event," said head of sovereign ratings David Riley.
"However, the reduction in interest rates and extension of maturities potentially offers Greece a window of opportunity to regain solvency, despite the formidable challenges that it faces," he said.
The summit agreed the region's rescue fund, the European Financial Stability Facility (EFSF), will be allowed to buy bonds in the secondary market if the European Central Bank deems that necessary to fight the crisis.
It can also for the first time give states precautionary credit lines before they are shut out of credit markets, and lend government money to recapitalise banks, both moves which Germany blocked earlier this year.
As part of the package, the euro zone leaders also made detailed provisions for limiting the damage of a temporary default - the first in western Europe for more than 40 years.
Riley said Greece may languish in default for only a few days and would likely get re-rated at single B or CCC.
Among other steps, the leaders agreed to ease terms on bailout loans to Greece, Ireland and Portugal; maturities will be extended to 15 years from 7.5 and interest cut to around 3.5 per cent from 4.5-5.8 per cent.
Doubts remain about whether the plan went far enough to assure not only Greece's debt sustainability but that of Ireland, Portugal and other heavily indebted nations.
The wider EFSF role is designed to prevent bigger euro zone states such as Spain and Italy from being shut out of markets because of fears of a weaker country defaulting.
Funds are sufficient so far but the burden could rise substantially. A precautionary credit line for a large country like Italy might total more than 500 billion euros over several years, overwhelming the EFSF's current 440 billion euros. – TradeArabia News Service