By Simon Miller

Greece’s debt-exchange with private creditors will constitute a ratings default according to a note from Fitch Ratings.

Following the agreement on the second tranche of bailout money yesterday morning, Fitch said it considered the proposal to reduce Greece's public debt burden via a debt exchange with private creditors would, if completed, “constitute a rating default, and result in the country's IDR being lowered to 'Restricted Default' ('RD') upon completion”.

The agreement will see private debt holders accept a 53.5% haircut and new bonds giving them a lower yield and Fitch said the “ratings of Greek government bonds affected by the exchange, including those not tendered but restructured under collective action clauses (CACs), which are expected to be imposed retrospectively on bonds issued under Greek law, will also be lowered to 'D' ('default') at this time”.

It added: “Shortly after completion of the exchange with the issue of new securities, Greece's sovereign rating will be moved out of the 'RD' category and re-rated at a level consistent with the agency's assessment of its post-default structure and credit profile.”

The agency has also downgraded Greece’s long-term foreign and local currency Issuer Default Ratings (IDRs) to 'C' from 'CCC' while the short-term foreign currency rating is affirmed at 'C'. The agency also affirmed the euro area Country Ceiling at 'AAA', which is applicable to all euro area member states.

The rating notice commented: “In Fitch's opinion, the exchange, if completed, would constitute a 'distressed debt exchange' (DDE) in line with its criteria and consequently yesterday's announcements set in motion the agency's process for reviewing Greece's issuer and debt securities ratings.

The sovereign IDR has accordingly been lowered to 'C' from 'CCC' indicating that default is highly likely in the near term. The ratings of the securities subject to the exchange have also been lowered to 'C' from 'CCC'.”

Fitch concluded: “Fitch regards the imposition of retrospective CACs as a material adverse change in the terms and conditions of GGBs in the context of an imminent debt exchange and confirms its assessment that the exchange will be distressed and de facto coercive on private holders of Greek bonds. Nonetheless, the primary credit event is the exchange itself and Fitch will rate Greece and its securities accordingly.”

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