Restricted default hangs over Greek bailout

After EU leaders approved their second 109 billion euro bail-out program for Greece, ratings agency, Fitch, says Greece will be reduced to ‘restricted default’, reflecting private bondholders needing to rollover debt, and lose in the process.

According to the program finally thrashed out by EU leaders on Thursday evening in Brussels, the European Financial Stability Facility and the International Monetary Fund will provide some 109 billion euros to Greece over three years.

The statement released by the Council of the European Union also envisaged an estimated 37 billion euros more to be raised from private investors, with a further 12.6 billion euro debt buyback programme, asking Greece’s bondholders to accept new debt with lower interest rates and a longer 30-year maturity.

Fitch says the new strategy and changed conditions applying to holders of Greek debt will effectively mean a loss of up 20 percent, which it says constitutes a “restricted default”.

“According to the IIF [Institute of International Finance], the proposed debt exchange implies a 20 percent net present value loss for banks and other holders of Greek government debt.”

Fitch’s move is a restricted default, in that the country as an issuer will be downgraded to default with Greek bonds not necessarily downgraded.

The Council of the European Union statement also indicated that the ESFS rates and maturities applying to Greece will also be applied to the bailouts of Ireland and Portugal, with additional time being provided to Italy and Spain to manage their budget deficits.

­William Engdahl, author of the book "Gods of Money," says that rating agencies are rushing to declare a credit default situation. But, he noted, they are not responsible for declaring defaults.

“The American rating agencies are really making fools out of themselves, rushing to declare a credit default situation,” he said. “They are not the ones who declare credit defaults; the [International Swaps and Derivatives Association] is entrusted with that responsibility. And they have not declared such things. So I think what we are witnessing here… is really an effect of a large-scale currency war between the two contending currencies for the world’s reserve currency status – the euro and dollar.”