Fitch gives Athens 'restricted default' status

RATING AGENCY:EUROPEAN LEADERS may have been cagey about calling Greece's second bailout a "default" but credit ratings agency Fitch had no such qualms yesterday. It slapped a "restricted default" status on Athens, and warned of a "potential precedent" for Ireland and Portugal.

However, the agency also said the deal by the euro zone’s heads of state represented “an important and positive step towards securing financial stability”.

“The reduction in interest rates and extension of maturities potentially offers Greece a window of opportunity to regain solvency despite the formidable challenges that it faces,” said David Riley, head of sovereign ratings at Fitch.

Mr Riley later told Reuters that if managed correctly Greece would be in default on its debt payment obligations for as little as a few days. The agency pledged to give Greece a higher “low speculative grade” rating once its bonds have been exchanged under the EU’s rescue plan.

Fitch also said the decision to reduce interest rates and extend the maturities of loans from the European Financial Stability Facility was “supportive” for the sovereign credit positions of Ireland and Portugal.

However, it added a sceptical note to the declaration by European leaders that private sector involvement in the Greek bailout would be an “exceptional and unique” event.

“If the Irish and Portuguese economies and public finances are not firmly on a sustainable path going into 2013, when both will need to regain access to medium-term market funding, the potential precedent set by private sector involvement in the Greek package will be incorporated into Fitch’s assessment of the risks to bondholders and reflected in its sovereign rating opinions and actions.”

Italian and Spanish bonds erased their gains yesterday afternoon as investors took the view that the risk of contagion from Greece could linger.

The “restricted” or “selective” short-term default by Greece is not expected to trigger insurance policies taken out on the debt – an event that would potentially shatter the nerves of investors across the euro zone. – (Additional reporting: Bloomberg/Reuters)