Bloomberg News

Greece Faces ‘Restricted Default’ on Debt Accord, Fitch Says

July 22, 2011

(Adds analyst comment from fourth paragraph.)

July 22 (Bloomberg) -- Fitch Ratings said Greece will be considered a “restricted default” after the 159 billion-euro ($229 billion) European bailout unveiled yesterday, given the plan includes getting bondholders to assume part of the cost.

“The proposed debt exchange implies a 20 percent net present value loss for banks and other holders of Greek government debt,” Fitch said today in an e-mailed statement. “An exchange that offers new securities with terms that are worse than the original contractual terms of the existing debt and where the sovereign is subject to financial distress constitutes a default event.”

Fitch said it will assign new post-default ratings, likely “low speculative grade,” to Greece after new securities are issued to bondholders. Greek two-year yields tumbled 7.5 percentage points to 26.30 percent at 2 p.m. in London, the lowest level in almost two months, on optimism the European Union plan will stem the sovereign-debt crisis that has roiled markets for almost two years.

“The event of restricted default may not be very disruptive for the market, because it’s likely to be brief,” said Charles Diebel, head of market strategy at Lloyds Bank Capital Markets. “It will be a one-off process, and Greece will be given credit ratings back soon after. In our view, that’s fairly positive.”

Today’s drop in Greek yields was the biggest since the EU and the International Monetary Fund created an initial 750 billion-euro fund to backstop the region in May 2010.

EU Plan

Greece would be rated “RD” should the plan be implemented, Fitch said. The company cut Greece by three levels to CCC on July 13. Greece was cut to Caa1 by Moody’s Investors Service on June 1 and CCC by Standard & Poor’s on June 13.

The financing package will consist of 109 billion euros from the euro region nations and the IMF. Financial institutions will contribute 50 billion euros after agreeing to a series of bond exchanges and buybacks to cut Greece’s debt load.

The extra yield investors demand to hold 10-year Greek debt instead of German bunds fell to 11.60 percentage points from 15.5 percentage points at the start of the week.

Greece’s debts will fall by 13.5 billion euros due to the bond exchange and “potentially much more” through buybacks to be outlined by governments, said the Institute of International Finance, a Washington-based group representing banks.

‘Life After Default’

“There is life after default,” said Aninda Mitra, head of Southeast Asian economics at Australia & New Zealand Banking Group Ltd. in Singapore and a former sovereign analyst at Moody’s. “It certainly helps to have a more equitable burden- sharing agreement, which will ease the insolvency burden that Greece was carrying upon itself, which politically would have been unsustainable.”

Russia, which defaulted on $40 billion of debt in August 1998 and devalued the ruble, now has an investment-grade rating three levels above junk from Moody’s, while S&P and Fitch grade the nation one step lower.

Argentina, which is still ranked below investment grade by all three ratings companies, defaulted on a record $95 billion worth of debt in 2001. After $62.3 billion was restructured in 2005, President Cristina Fernandez de Kirchner last year swapped a further $12.9 billion of securities. The debt-to-gross domestic product ratio fell to 48 percent as of June 2010 from as high as 166 percent in 2002.

Before yesterday’s accord, the EU forecast Greece’s debt burden will rise to 158 percent of GDP this year from 143 percent in 2010.

Euro-area leaders also empowered their 440-billion euro fund, the European Financial Stability Facility, to buy debt across stressed euro nations after a market rout last week sparked concern the crisis was spreading. The fund can also aid troubled banks and offer credit-lines to repel speculators.

“For now, the imminent risk to the monetary union itself has been significantly reduced,” Mitra said. The next step is “the implementation and the coordination between the EFSF, the national governments within the monetary union and the reforms that Greece has to implement.”

--With assistance from Shamim Adam in Singapore. Editors: Keith Campbell, Matthew Brown.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net.

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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