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Saturday 14 December 2019

Fitch regards rescue as 'restricted default'

Emmet Oliver

One of the world's most influential credit rating agencies has declared that Greece is set to become the first European country to default on its debts since just after World War Two.

Fitch, the French-owned agency, said the new plan to deal with the euro debt crisis included proposals that meant Greece was effectively defaulting on its debts.

The financial markets have been debating the word default for several months, but Fitch said it regarded the proposals for Greece, introduced by European politicians on Thursday night, to involve what it called a "restricted default" by the debt-ravaged country.

A default involves a country that is unable to repay investors who have lent it money.

Europe is trying to reduce the debt burden on Greece in two ways: by forcing investors to give Greece fresh loans and by stretching out the loans given to the country over longer periods.

In the second example, investors would swap shorter-term loans for longer-term loans, with Greece getting the benefit.

The investors, mainly banks, are being represented in talks with European authorities and Greece by the Institute of International Finance.

This trade association is attempting to guarantee the best possible deal for investors, who are facing at least some level of losses when an outcome is reached.

No European country has defaulted on its debts since Germany in 1948 and before that Spain, just before World War Two.

Defaults by emerging-market countries have been more common, with Argentina defaulting in 2001.

The losses for Greek bondholders are likely to involve investors getting about 80 cent in the euro, rather than the full amount.

Greece is getting a second bailout package from international lenders, amounting to about €109bn, with the bondholders providing about €50bn of this.

Fitch said it had to use the words restricted default because bondholders were getting terms that were "worse than the original contractual terms of the existing debt".

Euro-area leaders agreed to provide Greece with €159bn in new aid, including contributions from bondholders, to stem the debt crisis. They also empowered their €440bn rescue fund to buy debt across Europe after a market rout last week sparked concern that the crisis was spreading.

The fund can also aid troubled banks and offer temporary loans to countries if they are attacked by speculators.

The big issue now is will the European Central Bank (ECB) still accept Greek bonds, even those in default, as security for loans it gives the country's banks?

Its president Jean-Claude Trichet said the ECB may be able to do this if governments stand over the Greek bonds.

Irish Independent

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