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Greece Upgraded as Fitch Says Debt Swap Reduces Default Risk

March 13 (Bloomberg) -- Greece’s credit rating was lifted out of the default category by Fitch Ratings on optimism that a debt swap will reduce the risk that the country eventually reneges on its obligations.

Greece was raised four levels to B- from restricted default and given a stable outlook by Fitch, according to an e-mailed statement today in London. New government bonds have a B-rating, while debt that is not governed by Greek law has a C rating pending settlement on April 11, Fitch said.

“Completion of the exchange has cured the rating default event,” Fitch said in a statement. “The distressed debt exchange and the losses imposed on bondholders have significantly improved Greece’s debt service profile and reduced the risk of a recurrence of near-term repayment difficulties on the new Greek government securities.”

Greece last week used so-called collective action clauses to push through a debt swap that may eventually cut the country’s debt burden to 120 percent of gross domestic product by 2020 from as high as 170 percent. The transaction was part of a bailout package agreed with the European Union to stave off a collapse of the country’s economy.

“It’s purely a mechanical operation, although I think the stable outlook is questionable,” said Peter Chatwell, a fixed income strategist at Credit Agricole Corporate & Investment Bank in London.

‘Material’ Risk

At the same time, Fitch said that Greece remains at risk.

“The agency considers that significant and material default risk remains in light of the still very high level of indebtedness” and “profound economic challenges,” Fitch said. Still, “there is a limited margin of safety for debt service on the new securities over a 12-to-24 month horizon, reflected in the stable outlook.”

The debt swap seeks to wipe more than 100 billion euros ($131 billion) off Greece’s books and contain economic turmoil as European officials work to hold Greek leaders to their commitments. The deal allowed euro-area finance ministers to sign off on the second bailout late yesterday, clearing the way for the first payment from the 130 billion-euro package.

Greece is now in line to receive more than 100 billion euros in the next three years from the European Financial Stability Facility, the euro region’s temporary rescue fund. That will start with payments of 5.9 billion euros in March, 3.3 billion euros in April and 5.3 billion euros in May, according to EFSF Chief Executive Officer Klaus Regling.

Greece’s Challenge

The government faces the challenge of continuing to meet targets laid down by international creditors to receive funding at three-monthly intervals at a time when the economy is in its fifth year of recession and youth unemployment exceeds 50 percent. The outcome of elections in April or May could test efforts to maintain austerity.

“The prospect of a general election and uncertainty over the composition and commitment of a new government” to the rescue program “also poses a significant risk,” Fitch said. “Nonetheless, the sustainability of the public finances and ultimately Greece’s membership of the euro zone depends upon the implementation and effectiveness of structural and fiscal reforms.”

The swap leaves Greece on track to shrink its debt to 117 percent of gross domestic product by 2020, creating a buffer as the country strives to meet its commitments, Jean-Claude Juncker, who chairs the euro region’s group of finance ministers, said yesterday. Greece’s future in the euro area is assured “whatever will happen,” he said.

While a debt-to-GDP ratio of about 120 percent by 2020 is achievable, “this outcome is very sensitive to assumptions regarding the implementation of fiscal austerity and economic growth,” Fitch said. “The current government has completed a long list of ‘prior actions’. However, their implementation is likely to prove very challenging for any administration.”

To contact the reporter on this story: John Fraher in London at

To contact the editor responsible for this story: Craig Stirling at

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