Credit rating agency Fitch said today that it will give Greece a selective default credit notation, the day after the euro zone agreed a new rescue for Greece totalling about €109 billion.
The agency judged that the rescue, involving a reorganisation of Greek debt with private involvement, was important and positive to containment of the euro zone debt crisis, but said it meant that Greece would default on payments on existing debt, according to Fitch's criteria.
Fitch ratings agency said today that it would consider debt-stricken Greece to be in limited default under the terms of a second euro zone bail-out agreed at an emergency Brussels summit.
Fitch said the overall accord agreed yesterday 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% 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 bail-out.
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 bail-out, said the 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,' it added.
Meanwhile, EU officials 'expect' Ireland to get a reduction in interest rate to 3.5% for the EFSM part of the country's bail-out as well as the EFSF part, officials said at a a technical briefing in Brussels today.
EU officials also said they expect any selective default of Greek bonds to be reversed within days.
The officials said that the bail-out includes €20 billion to recapitalise Greek banks. It assumes that Greece's privatisation will raise only €28 billion, not the €50 billion as envisaged in the original programme.
They also said that €45 billion left over from the first bail-out package is not included in the €109 billion figure.
EU bail-out deal 'great relief' for Greece - Athens
The debt rescue for Greece announced by euro zone leaders is a 'great relief' for the economy and a sound guarantee for its banks, the Greek finance minister said today.
'There is great relief in the Greek economy,' Finance Minister Evangelos Venizelos told a news conference in Athens.
'The public debt is placed under control, the country is safe...there is a general mobilisation, a hard European front in favour of Greece, the euro and Greek banks,' the minister said.
The minister gave his assessment hours after euro zone leaders and private creditors agreed to give Greece a new bail-out, risking a potential default to prevent the debt crisis from spreading worldwide.
Greek media gave a warm welcome to the rescue scheme, describing it as a crucial 'life jacket' for the country's floundering economy while warning that the crisis was far from over.
The euro zone and the International Monetary Fund will provide €109 billion while private banks will share the costs with €54 billion to 2014, under the deal agreed at an emergency summit late last night.
However, the banks estimate that the total cost to them by 2020 will be €135 billion. 'Greek banks are guaranteed and assured,' Venizelos said.
But he insisted that Greece had to apply assiduously the reforms agreed with the EU and the International Monetary Fund to keep alive hopes of returning to economic growth next year. 'Without a national effort we will not meet our goals,' Venizelos said.
The new bail-out for Greece comes after the European Union and IMF's €110 billion bail-out last year proved insufficient, with the financial markets tightening the screws on Athens.
Lending terms to Ireland and Portugal will also be eased and the €440 billion European financial stabilisation fund (EFSF) would be allowed to buy bonds in the secondary market to fight contagion risks.
Private creditors who hold Greek debt that matures in the coming years will 'voluntarily' turn in their bonds and accept new ones that mature far in the future.
'Holders of bonds that mature by 2020 will be given new 30-year bonds guaranteed by the system,' Venizelos said. 'This is a very major rollover that benefits Greece,' he added.
'There is confidence that there will be a large participation by banks,' he said. Private sector creditors globally hold around €135 billion in Greek debt maturing by 2020, Venizelos said.
As regards the 'intricate' details of the rollover, which are still being hammered out, Venizelos said some bonds held by banks would be exchanged at 100% of face value but others would be traded at 80%.
