Fitch Ratings said Greece faces ``restricted default’' after euro-area leaders agreed on a new bailout for the nation that would involve contributions from bondholders.
The private sector involvement in a new deal “in Fitch’s opinion, constitutes an event of ‘Restricted Default,’” the ratings company said in a statement today. “According to the Institute for International Finance, the proposed debt exchange implies a 20 percent net present value loss for banks and other holders of Greek government debt. 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 under Fitch’s ‘Coercive Debt Exchange Criteria.’”
Euro-area leaders agreed yesterday to provide Greece with 159 billion euros ($229 billion) in new aid, including contributions from bondholders, to stem the debt crisis. They also empowered their 440-billion euro rescue fund 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.
European Central Bank President Jean-Claude Trichet said policy makers may be able to accept Greek collateral in the event of a default because euro-member nations have agreed to provide guarantees. Heads of governments said they will back Greek bonds up to the value of 35 billion euros in refinancing operations in the event that the country is judged in default on its loans, Trichet added.
The financing package will consist of 109 billion euros from the euro region and the International Monetary Fund. Financial institutions will contribute 50 billion euros after agreeing to a series of bond exchanges and buybacks that will also cut Greece’s debt load, according to the communiqué.
Fitch Ratings downgraded Greece by three levels to the lowest grade for any country on July 13, saying a default is a “real possibility.”