Sunday, March 25, 2012

Fitch Upgrades Greek Debt Amidst Debt Writedown

Bloomberg: Greece has Rating Upgraded by Fitch
Boston Globe: Greek Debt Upgraded, but Outlook Still Grim
Business Day: Fitch Lifts Greece out of Default Territory
Eurostat News Release: Euro Area Government Debt Down to 87.4% of GDP

On Tuesday March 14, credit rating agency Fitch upgraded future Greek bonds from a “restricted default” to a B- rating. Fitch is the first of the major ratings agencies to upgrade Greek debt. The main reason for the improved outlook is the recent debt write-down, or “haircut,” accepted by 83.5% of private investors holding Greek bonds. The haircut will result in private debt holders taking investment losses of more than 70%, which includes both lost interest and principal, and will cut Greece’s debt burden by $159 billion—about one third of Greece’s total debt. Fitch also assigned a “stable outlook” for Greece, meaning it is not expected to change Greece’s rating again in the near future.

The B- rating applies to all future bonds Greece issues. Unfortunately, a B- rating qualifies as junk status, meaning Greek debt is not viewed as a stable investment in the international markets and regulations prevent some institutional investors from purchasing junk bonds. Foreign-law bonds, which are not governed by Greek law and therefore were not forced to agree with the Greek 70% haircut, maintained their C rating based on the uncertainty surrounding their debt write-down settlement scheduled for April 11.

The debt write-down is a positive sign for Greece. First, the haircut was a central aspect in the Eurozone and IMF deal agreeing to provide $226 billion in bailout funds over the next few years. That total includes amounts not yet disbursed from the initial Greek bailout, along with $170 billion in new bailout funds. Second, the write-down significantly decreases Greece’s debt-to-GDP ratio. Currently, the Greek debt-to-GDP ratio stands at approximately 160%, but an IMF report claims that the write-down paves the way for the ratio to fall to 116.5% by 2020 and 88% by 2030. However, that same report notes that the country’s debt-to-GDP ratio could remain as high as 145% in 2020 if Greece is not financially disciplined.

Even amidst the debt upgrade, international debt experts warn that Greece’s recovery is still a long way off, meaning employment and economic growth will be slower than expected. While the debt writedown paves the way for the immediate disbursement of bailout funds, Greece must continue to meet fiscal targets every three months set by international creditors to receive future bailout funds. While the debt haircut greatly decreases Greece’s current obligations and led to a ratings upgrade, the financial future of Greece remains very unclear.

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