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26th Sep 2022

Greece to face 'restricted default' as bailout details emerge

Greece is to face a 'restricted default' due to the voluntary participation of the private sector in its second bailout, credit ratings agency Fitch said Friday, one day after eurozone leaders agreed on a €109bn rescue package.

"Fitch considers the nature of private sector involvement to constitute a restricted default event," the agency said in a statement confirming the warning made by the European Central Bank ahead of the deal sealed on Thursday night, after Germany insisted that banks take a 'voluntary' cut of 21 percent on their returns on Greek bonds.

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  • The EU will keep funding Greece until it can sustain itself (Photo: aranjuez1404)

Depending on the rate of participation in the 'voluntary' plan, banks are estimated to contribute €37bn on top of the EU-IMF bailout of €109bln. Greece is already under an EU-IMF rescue programme which will end in May 2013. The new deal extends this programme by another year.

Fitch also said that the rating of Greece's post-default bonds will be upgraded to "low speculative grade", after new, EU-backed securities are issued to prop up the Greek bonds.

The Fitch announcement did not come as a surprise, as eurozone leaders on Thursday were already braced for a "selective default" for Greece after involving private investors and suggesting that Greek bonds will not be repaid entirely.

According to EU officials who participated in the discussions on Thursday, the leaders are counting on a "very limited" default which would last only for a few days, after which Greece's rating will be considerably improved.

In order to cushion the losses for banks which are not part of the voluntary scheme but have a large exposure to Greek debt, the eurozone leaders agreed to set aside €20bn for bank recapitalisations and €35bn in special guarantees for the ECB, which already has Greek bonds that will be rated as defaulted.

Markets reacted well to the news about the second Greek bailout and the EU-guaranteed bonds in case of a default, with two-year yields dropping by 7.5 percent to 26.3 percent, a two-month low.

"There is a great breath of relief for the Greek economy and this will gradually pass on to the real economy," Greek finance minister Evangelos Venizelos told reporters on Friday. "But by no means does this mean we can relax our efforts," he added.

Part of the €109bn figure is also the assumption that the Greek privatisation program goes ahead and returns at least €28bln. Athens has estimated that by selling state-owned assets and company shares, the government will be able to bring about €50bn.

"It is clear there is still much work to be done in all corners of Europe before we are firmly out of the stormy waters. But the direction is now clear," economics commissioner Olli Rehn said Friday in a statement.

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