Fitch cuts Greece, warns against ‘re-profiling’

Greece's credit ratings were cut again by Fitch and this time to the junk level status and also warned that any other attempts to extend the maturities of Greek debt to be a default.

May 20, 2011, 12:33 p.m. EDT
By William L. Watts
MarketWatch

LONDON (MarketWatch) — Fitch Ratings lowered Greece’s credit rating further into junk status Friday, and warned it would consider any attempt to extend the maturities of Greek sovereign debt to be a default.

The agencv cut Greece’s long-term rating to B-plus from BB-plus and placed all ratings on Rating Watch Negative, citing the scale of the nation’s fiscal task as it attempts to achieve solvency and provide a foundation for economic growth.

The move comes on growing speculation — and a widening rift among European policy makers — over some type of restructuring of Greece’s sovereign debt.

The euro EURUSD -0.88% extended a loss against the dollar to change hands at $1.4174 in recent action, a drop of 1% from Thursday.

Risks have risen as Greece must implement further austerity measures in order to meet its deficit-reduction goals, Fitch said.

An emphasis on privatization runs the risk that conditional funds from the European Union and International Monetary Fund could be held up if Greece runs into political and technical obstacles to plans to sell 50 billion euros ($71.2 billion) worth of assets by the end of the year, the company said.

In a statement, the Greek finance ministry said the decision ignores the government’s additional commitments to meet its 2011 fiscal targets and to accelerate its privatization program.

Fitch said the B-plus rating incorporates expectations that “substantial new money” will be provided to Greece by the EU and IMF and that Greek government debt won’t be subject to a “soft restructuring” or a “re-profiling” — terms which are taken to refer to the potential voluntary extension of debt maturities.

Fitch also warned it would consider any move to extend the maturity of Greece’s existing bonds as a “default event,” and would rate Greece and its obligations accordingly.

“The market was surprised because some people have been trying to argue that re-profiling, or lengthening Greece’s maturities, wouldn’t be a default event. Now Fitch says it would be a default,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.

European Union officials earlier this week broached the possibility of a “soft restructuring” or “re-profiling” of Greek debt if the country were to implement additional measures.

That brought strong warnings from European Central Bank officials, who contend any sort of restructuring would wreck the banking sector in Greece and potentially elsewhere in Europe, given banks’ exposure to Greek debt.

Juergen Stark, a member of the European Central Bank’s executive board member, earlier this week warned that the central bank, in such circumstances, would exclude Greek debt for use as collateral in return for funding, The Wall Street Journal reported.

‘Boiling point’

Also Friday, Norway said it suspended the payment of a $42 million grant to Greece because the country hasn’t lived up to obligations under the grant agreement, Dow Jones Newswires reported. Greece was required to take a 50% stake in projects under the fund, which were aimed at reducing differing economic and social conditions in Southern and Central Europe, Norway’s foreign ministry said.

Peter Boockvar, managing director at Miller Tabak & Co., said the story contributed to a “tizzy” in the markets, even though the amount was trivial and the fact that the suspension had nothing to do with the Greek bailout plan.

“With this said, the Greek situation has hit a boiling point and Greece and the ECB must come to some agreement with EU finance ministers and the IMF immediately, as the situation is getting out of control,” he said, in emailed comments.

William L. Watts is a reporter for MarketWatch in London.

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