Fitch first to downgrade Greece to speculative default as CDS tumble

Earlier today, Fitch announced it would be the first rating agency to declare Greece has defaulted, albeit on an interim basis. 

According to Reuters, Fitch Ratings will declare Greece in restricted default on its debt due to the steps taken in a new euro zone rescue package but will likely assign new ratings of a low speculative grade once a bond exchange is completed, the agency said on Friday. 

The agency said that the reduction in interest rates Greece is paying on its debts and extension of maturities gave it a chance of regaining solvency and would support its rating. 

“Fitch will assign new post-default ratings to Greece and to the new debt instruments once the default event is cured with the issue of new securities to participating bondholders,” the agency said. “The new ratings will likely be low speculative-grade.” Elsewhere, confirming that now that Greece is an explicit ward of the EFSF, read Germany and France its rating do not matter, Greek CDS tumbled the most ever, tightening by 500 bps to 1,500 in hours. However, since Greece now exists in a state of limbo when it comes to capital markets and since without the explicit support of the EFSF the country would be insolvent, there is little sense to look at its “risk” through the lens of fixed income any more. 

Lastly, as the following selection of analyst commentary indicates, there is nothing about this “solution” that is actually beneficial in the long run. FxPro’s Simon Smith, chief economist and Michael Derks, chief strategist, in London: ‘‘Eventually, a forced default is still more likely than not. The euro will breathe a sigh of relief, but there’s little reason to party’’
Citigroup Inc.’s Valentin Marinov, a currency strategist in London: “The key issue is whether the current bailout will lastingly reduce investors’ concerns about debt sustainability in Greece and the euro zone periphery more generally. We think not’’
Morgan Stanley strategists led by Hans Redeker, head of foreign- exchange strategy in London: ‘‘What we did hear out of Brussels does not convince us that euro markets can remain stable for long. While the EFSF now has the flexibility required to deal with the challenges of protesting credit markets, the size of the EFSF has not been increased, leaving markets guessing how long it may take before this market-calming instrument may run out of funds’’
Bank of Tokyo-Mitsubishi UFJ Ltd.’s Lee Hardman, a currency strategist in London: ‘‘The plan falls short of achieving debt sustainability with debt to gross domestic product ratios for Greece, Portugal and Ireland still likely to remain comfortably above 100 percent. A continuation of solvency concerns will leave the door open for contagion fears to rebuild. Beyond the new bailout euphoria, relative economic fundamentals are turning against the euro with growth in the euro-zone slowing sharply’’

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