Bloomberg News

Fitch Says 50% Greek Bond Haircut Would Be Default Event

October 28, 2011

(Updates with analyst comment in fourth and last paragraphs, adds bond yields in fifth. For more on the European debt crisis, see EXT4.)

Oct. 28 (Bloomberg) -- European leaders’ agreement on a 50 percent haircut on Greek bonds may create an event of default if investors accept it, Fitch Ratings said in a statement today.

“The 50 percent nominal haircut on the proposed bond exchange would be viewed by the agency as a default event under its Distressed Debt Exchange criteria,” the statement said. While the accord is “a necessary step to put the Greek sovereign’s public finances on a more sustainable footing,” Greece will face “significant challenges” including ratios of government debt to gross domestic product at “well over 100 percent even in a positive scenario.”

European officials concluded their 14th crisis summit in 21 months early yesterday in Brussels with an agreement that persuades investors in Greek government bonds to write down half their holdings. Fitch said today that more details are needed on the accord, which includes an increase in the region’s rescue fund to 1 trillion euros ($1.4 trillion).

“It’s highly likely that all three rating agencies will classify this restructuring as a technical default,” said Padhraic Garvey, head of developed debt-market strategy at ING Groep NV in Amsterdam. “Even if it’s voluntary, investors are left with a product that’s lower in value to what they originally agreed.”

Greek Yields

The yield on Greece’s 10-year bonds declined for a second day, falling 9 basis points to 23.25 percent. The extra yield, or spread, investors demand to hold the debt instead of German securities dropped to 2,016 basis points from 2,114 yesterday.

“The main elements of the announced policy measures appropriately target the key causes of the recent intensification of the euro area crisis,” Fitch said. “The agency views the broad framework agreement on key principles as a positive outcome of the summit.”

Fitch said it welcomed the agreement on banks reaching core capital ratios of 9 percent as an “important step towards enhancing confidence in the euro area financial system.” Still, while conditions remain fragile, “further bouts of financial market volatility appear likely and downward pressure on sovereign ratings will persist.”

ECB Role

“Given this level of uncertainty and until the viability of these options can be assessed, Fitch views as critical the role of the ECB in continuing to intervene in the secondary market for euro area sovereign bonds, and ultimately to be ready to act as a lender of last resort to solvent but illiquid sovereigns,” the statement said.

Fitch said in a separate report the Greek debt exchange “would likely result in a post-default rating in the ‘B’ category or lower depending on private creditor participation.”

The International Swaps and Derivatives Association, whose market decisions are binding, hasn’t said whether the $3.7 billion of credit-default swaps linked to Greek government bonds should pay out, though it has indicated the decision hinges on whether investors accept losses voluntarily.

A credit event can be caused by a reduction in principal or interest, postponement or deferral of payments or a change in the ranking or currency of obligations, according to the New York-based trade group’s rules.

ING’S Garvey said Fitch’s announcement probably won’t trigger insurance contracts linked to the debt. “The indications are that ISDA won’t class it as a credit event,” he said.

--Editors: Craig Stirling, Andrew Atkinson

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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