August 18, 2022

Fitch Warns Against Rollover of Greek Debt

PARIS — Fitch Ratings said Tuesday that it would consider even a voluntary rollover of Greece’s sovereign debt as a default that would lead it to cut the country’s credit rating, while the U.S. Treasury Secretary criticized Europe for failing to speak with one voice on the Greek debt crisis.

European leaders have been desperately trying to prevent a Greek debt default, which would have an impact on global markets and could fatally undermine the monetary union. Some analysts have said it could have an impact on credit and debt markets comparable to the one that followed the collapse of Lehman Brothers in 2008.

The warning by Fitch kept pressure on the new Greek government, which faced a vote of confidence in Athens late Tuesday, as well as on European policy makers as they work on a second bailout for the country.

If the Greek government survives the vote, as expected, Parliament will be asked to endorse further spending cuts, which are a condition of receiving another disbursement of €12 billion, or $17 billion, from last year’s €110 billion bailout from the European Union and the International Monetary Fund.

“The assumption must be that if these two critical votes are passed, the short-term pressure on Greece will ease,” said Adam Cole, head of foreign exchange strategy at RBC Capital Markets in London.

Speaking in Washington on Tuesday, the U.S. Treasury secretary, Timothy F. Geithner, called on Europe to agree on a strategy on Greece and communicate their plans to the markets.

“It would be very helpful to have Europe speak with a clearer, more unified voice on the strategy,” Mr. Geithner said, according to Bloomberg News. “I think it’s very hard for people to invest in Europe, within Europe and outside Europe, to understand what the strategy is when you have so many people talking.”

Mr. Geithner said he told Group of 7 leaders last weekend that the European Union has “a very substantial financial arsenal” at its disposal and needed to ensure that it was “available to be deployed to do the kind of things they need to do to make this process work.”

“That means make it available so banks can be recapitalized where they need capital, to make sure there is a funding available to the banking system,” he said, according to Bloomberg. He added that there was “no reason why Europe cannot manage these problems.”

Euro zone finance ministers have said that a second Greek bailout would include a contribution by private holders of government bonds. Ministers have asked that the contribution be voluntary but “substantial,” but its exact nature remains uncertain.

That uncertainty has raised concerns at Fitch and other ratings agencies. Andrew Colquhoun, head of Asia-Pacific sovereign ratings for Fitch, told a conference in Singapore early Tuesday that Fitch would regard a debt exchange or voluntary debt rollover “as a default event and would lead to the assignment of a default rating to Greece.”

Cristina Torrella, senior director in Fitch’s financial institutions group, said in a statement that a restructuring or rollover of Greek government debt “would not automatically trigger a default by the major Greek banks.”

“The precise rating actions on the banks will depend on the full terms of the sovereign event and the extent to which this considers maintaining solvency and, vitally, liquidity in the Greek banking system,” Ms. Torrella said.

The most crucial immediate consideration for bank ratings, Fitch said, would be whether a mechanism remained for the European Central Bank to continue providing liquidity to Greek banks.

A month ago, Fitch downgraded Greece’s credit rating three notches to B-plus and warned it could cut it again, sending it deeper into junk territory. At the time, Fitch said that extending the maturity of existing bonds would be considered a default.

Standard Poor’s cut Greece’s rating to CCC from B last week, and warned that any attempt to restructure the country’s debt would be considered a default. On Tuesday, in an interview with a senior executive published by the German newspaper Die Welt, S.P. reaffirmed that a voluntary debt restructuring for Greece, as currently foreseen by euro zone governments, would probably be deemed a default.

The other big ratings agency, Moody’s Investors Service, has a Caa1 rating on Greece’s sovereign debt.

The International Swaps and Derivatives Association, an industry body, has said that a debt exchange that extended maturities would not be considered a formal default because it would not trigger payment on contracts to insure against default, which are known as credit default swaps.

The euro was quoted at $1.4357 in London before the crucial Greek vote, up from $1.4304 late Monday. European shares were mostly higher.

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