Fitch Call Greece Nth Bail-Out Package a "Default"

Every time a new bail-out news has been thrown out during the past few weeks, we have seen the risk-on trade make the markets jump sky high. Equities, commodities, the Euro are all a few percent points away from multi-year highs. How sustainable is this rally? I don't know. I never thought the irrational exuberance, the over-bullishness, and rosy view of market participants would last so long and would disregard the collapse that is happening before our eyes. Note that the same happened in 2007. I made the mistake to believe that the markets memory would last more than a couple of months.

Anyway, the news is out: Greece is rated as "default" by Fitch, and the other PIGS will also be downgraded soon:

WSJ—Fitch Ratings Inc. on Friday became the first of the three major ratings companies to say that a new aid package for Greece will put the country in "restricted default" and ratings of other peripheral euro-zone countries will also be affected.

Fitch said the Greek deal sets a "potential precedent" for private-sector involvement in sovereign-debt restructuring that will be incorporated into its ratings of Ireland and Portugal if those countries don't see a sustainable recovery by 2013.

Euro-zone leaders attending an emergency summit Thursday agreed to provide €109 billion ($157.22 billion) in new loans for Greece while the private sector will contribute an additional €50 billion through a bond-exchange and buyback plan.

They said in a statement that Greece "requires an exceptional and unique solution," and that other euro-zone countries "solemnly reaffirm their inflexible determination to honor fully" their own sovereign bonds.

"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," Mr. Rehn said. "But the direction is now clear, and we have all reasons to be confident about getting there, as long as all the partners do their share of implementation rigorously."

The Greek bailout plan implies a 20% net present-value loss for banks and other holders of Greek government debt, Fitch said.

It will lower Greece to the relevant restricted-default rating at the end of the bond-exchange process, and then assign new ratings to the country when new bonds are issued. The new ratings are likely to be low speculative grade, Fitch said.

Fitch can rate an issuer RD if there is "a coercive debt exchange on one or more material financial obligations," according to the ratings company's website. Fitch currently rates Greece triple-C. It rates Ireland triple-B and Portugal triple-B-minus.

The move is in line with Fitch's statement in early June that it would judge as a default any exchange that offers new securities with terms worse than the original terms of the existing debt, and where the country is under financial distress.

The European Central Bank had repeatedly warned against any plan that would lead to a sovereign default, fearing the crisis could spread to other weak euro-zone countries. European Central Bank President Jean-Claude Trichet had made it clear the bank wouldn't accept defaulted bonds for its lending operations.
[...]
Greek Finance Minister Evangelos Venizelos said the bailout package assures that Greek banks will remain supported and capitalized.

"Under the plan the Greek banks' liquidity will be secured 100%," Mr. Venizelos told a press conference in Athens Friday.

In the bond markets, the euphoria that had greeted the announcement of the deal began to fade in afternoon trading in Europe Friday.

A few notes:

1. "The direction is clear"? I still see no direction to be honest, plans are changing every day or so. Moreover, it looks like the plan is to load up on more debt and make sure the collapse of the other Eurozone countries — all are insolvent except Germany — happen sooner. Politicians are really so ignorant.

2. The plan involves a 20% haircut and a roll over of the remaining debt. Yet, financial "experts" and politicians are criticising Fitch for calling it a "default". In the real world (outside of the realms of politicians) you have to call a spade a spade.

3. Kicking the can down the road seems to have now reached a limit: in 2000 they managed to squeeze 7-8 years. In 2008-2009, they managed to kick the can 2 years further. Last year, they managed to make another year with the Greek bailout, but this year, every month or now weeks brings the limits... Seems like we have now reached a one/two-day period.

4. Trichet has yet again been slapped. And it's a well deserved one. His arrogance and ineptitude have really now limits.