Fitch ratings agency said Friday that it would consider debt-stricken Greece to be in limited default under the terms of a second eurozone bailout agreed at an emergency Brussels summit.
Fitch said the overall accord agreed Thursday was an important step forward but because private sector creditors will lose money on their holdings of Greek government bonds as a result, then Athens must be considered to be in ‘Restricted Default’ and its debt assigned ‘Default’ ratings.
Banks and other financial institutions agreed to swap their current Greek government bond holdings for new debt, taking a loss of 21 percent in the process, which Fitch said justified the default rating.
It currently rates Greece CCC, the lowest level.
Once the exchange is completed, however, Fitch said it would then issue fresh, likely higher ratings for new Greek bonds as the government’s position is strengthened by the bailout.
Fitch “will assign new post-default ratings to Greece and to the new debt instruments once the default event is cured with the issue of new securities to participating bondholders,” it said in a statement.
“Along with other relevant factors, the extended maturity structure and reduction in the net present value of the Greek public debt stock will be reflected in the new post-default sovereign rating that will be assigned to Greece and its debt instruments on completion of the exchange.
“The new ratings will likely be low speculative-grade,” it added.
The ratings agency, which had earlier warned along with peers Moody’s and Standard and Poor’s that it would rate Greece in default if the banks took a loss in a new bailout, said Thursday’s Brussels deal was “an important and positive step towards securing financial stability in the euro zone.
“A more unified and coherent policy response to the Greek crisis and broader financial instability across the euro zone eases near-term pressure on sovereign credit profiles and ratings across the region.”
In the run-up to Thursday’s summit, the European Central Bank argued strongly against any arrangement which would involve even a partial default but Germany insisted that the private sector had to be involved.
The taxpayer could not be expected to stump up more funds for Athens unless the private sector did its bit, German Chancellor Angela Merkel insisted.
After talks with French President Nicolas Sarkozy, who also wanted to avoid a default which could potentially destabilize the whole eurozone, a compromise was reached on limited private involvement and a limited default.
Brussels and the EU now hope to be able to manage a partial ̶ and therefore temporary ̶ default under provisions for bank funding in the overall, 160 billion euro bailout accord.
Agreement became imperative when the debt crisis, which has already claimed Greece, Ireland and Portugal, looked as though it could snare Italy and Spain, the third and fourth largest eurozone economies.
Fitch also warned that the Brussels deal did not mean that the eurozone was out of the debt woods.
“Until there is a sustained and broad-based economic recovery across the region, allied with continued progress on reducing outsized government budget deficits and structural reforms to enhance long-term potential growth, further episodes of financial market volatility cannot be discounted and downward pressure on sovereign ratings will persist.”