Fitch: Greek deal to put country in default

By David Mchugh

Associated Press

Published: Friday, July 22 2011 5:30 a.m. MDT

Greek Finance Minister Evangelos Venizelos speaks during a news conference in Athens, on Friday, July 22, 2011. Greece's finance minister expressed "great relief" Friday in the wake of a second European bailout for the country's crisis-hit economy, and markets rallied on the news.Eurozone countries and the International Monetary Fund pledged Thursday to give Greece a 109 billion euros ($155 billion) worth of rescue funds, on top of the 110 billion euros granted a year ago.

Petros Giannakouris, Associated Press

BRUSSELS — A leading ratings agency said Friday that Greece will be ruled in default on its debt obligations as a result of a new eurozone plan to ask investors to take losses on the loans to help put the country back on its feet.

The plan includes asking bondholders to accept new debt with lower interest rates and a longer 30-year repayment to help cut the country's debt burden and give it time to reform its economy. While principal won't be cut, the lower rates over time will mean investment losses for those holding the bonds.

When a debtor changes the terms of a loan to the creditors' disadvantage, it is considered in default, and European leaders knew their plan would probably force the downgrade.

But Greece's stay in default will likely be brief. Fitch Ratings said Friday that it could move it up to junk-level as soon as it issues the new, replacement bonds.

Government debt default is a fairly common occurrence among poorer countries, but this instance would be a first for a member of the wealthy eurozone, and a blow to the prestige of the common currency. Greece joins countries like Ecuador, Uruguay and Ukraine that have defaulted in recent years. Still, many economists have been saying for months that it is unavoidable since Greece's debt burden is too big to pay and must somehow be reduced.

Fitch said that bondholders would lose some 20 percent of the value of their investments under the deal reached Thursday night, a wide-ranging €109 billion ($156 billion) aid plan that also gives Greece new loans, supports Greek banks and cuts interest rates on bailout credits.

It also empowers the eurozone's bailout fund to move more quickly to aid struggling countries in an attempt to keep the crisis from mushrooming from already bailed-out Greece, Portugal and Ireland to bigger countries such as Spain and Italy.

The agency said that as soon as the offer period for the new, longer-maturity bonds closes, Greece will get a rating of "restricted default." Once the new debt is actually issued, Greece would probably get a new rating in the low speculative grade area. The new bonds would be guaranteed by eurozone governments.

European officials resisted the idea of letting Greece default on its debts for most of the 21-month debt crisis that began when a new government revealed the extent of the country's financial troubles. But a €110 billion ($156 billion) bailout in the form of loans from the eurozone and the International Monetary Fund last year did not put the country back on its feet.

The new deal aims to reduce the size of Greece's debts, which many economists say are too big to be paid no matter how much additional credit the country gets. Greece owed some €340 billion at the end of last year, or 143 percent of economic output. That figure is expected to reach 160 percent as the country struggles to close its budget deficit during a deep recession.

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