Greek debt crisis: ratings agency raises default fears over bonds

Fitch’s warning came just hours ahead of a crucial confidence vote that could bring down the Greek government Europe’s hopes of preventing Greece defaulting on its debts were knocked on Tuesday as ratings agency Fitch declared that it will declare the country to be in default if commercial banks agree to roll their loans over, as EU finance ministers are planning. European leaders, led by France and the European Central Bank, argue that Greek lenders could choose to buy new, longer maturing bonds when their existing debts mature, as part of a second Greek rescue package. They say that lenders would be under no compulsion to make the swap, rather than cashing the bond in, so Greece would not be defaulting on its debts. Fitch, though, refuses to accept this. “Fitch would regard such a debt exchange or voluntary debt rollover as a default event and would lead to the assignment of a default rating to Greece,” Andrew Colquhoun, head of Asia-Pacific sovereign ratings with Fitch, told a conference in Singapore early on Tuesday. Fitch had previously signalled its opposition to lenders exchanging their debts for longer-dated securities – which had been Germany’s favoured plan, until Angela Merkel accepted defeat last Friday . Like the other agencies, it believes that any deal where lenders receive securities on worse terms than the original contractual terms of the existing debt should be classed as a “distressed” debt exchange. Colquhoun’s comments “further cast doubt on the ability of Greece to avoid a default, or credit event,” according to Michael Hewson of CMC Markets . The warning came just hours ahead of a crucial confidence vote that could bring down the Greek government, as it struggles to pass a new raft of austerity measures to qualify for €12bn in aid. Without this money, Greece will probably be unable to repay debts that mature in July and August. Negotiations over the second rescue package, worth an estimated €120bn (£106bn), are continuing after EU ministers failed to reach agreement at a meeting in Luxembourg on Monday. The lack of progress has tested the patience of both the financial markets and the International Monetary Fund, which warned that the lack of decisive action risked another global financial meltdown . EU ministers hope to reach agreement in July. They stated on Monday that second bailout is to be “financed through both official and private sources … in the form of informal and voluntary roll-overs of existing Greek debt at maturity for a substantial reduction of the required year-by-year funding within the programme, while avoiding a selective default for Greece.” If the ratings agencies declare that Greece has defaulted, then banks would be forced to write down the value of their Greek debt. This would also prevent them from using it as collateral. Analysts fear that a Greek default could trigger panic across the sector, with some comparing it to the collapse of Lehman Brothers in 2008. IMF flies into Athens European stock markets opened higher on Tuesday morning, driven by optimism that a rescue deal can be agreed. The FTSE 100 index had gained 40 points by midday, to 5733. The vote of confidence in Geoge Papandreou’s reshuffled government is expected to take place at 10pm BST. John Hydeskov, chief analyst at Danske Markets in London, warned there could be disatrous consequences if the Greek parliament does not approve the new package of spending cuts, in the face of widespread public opposition. “The alternative of not getting the money is so frightening that we don’t have another choice,” he told CNBC. Officials from the International Monetary Fund and the European Union are flying into Athens on Tuesday, a sign of the importance of the vote. “Without more austerity Greece may not see further EU funding, which would bring default closer,” said Jane Foley of Rabobank. Opponents of a second bailout argue that it would only ratchet up the economic and political cost of the crisis, without providing a solution. “A second Greek bailout is almost certain to result in outright losses for taxpayers further down the road because, even with the help of additional money, Greece remains likely to default within the next few years,” said Raoul Ruparel, analyst at the Open Europe think tank. “Another bailout will also increase the cost of a Greek default, transferring a far bigger chunk of the burden from private investors to taxpayers,” Ruparel added. Open Europe estimates that each household in the eurozone underwrites €535 in Greek debt, through the existing loan guarantees. By 2014, if a second bailout is agreed, this will increase to €1,450 per household, it claimed. European debt crisis Ratings agencies Greece Europe Europe Bonds Graeme Wearden guardian.co.uk

Posted by on June 21, 2011. Filed under News, Politics, World News. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.