Fitch Ratings warned that the 50 percent “haircut” specified by the European Union (EU) recent debt deal will not help Greece’s low sovereign debt rating.
“An EU invitation to private investors in Greek government debt to exchange their bonds for new debt with a 50 percent lower notional value would likely result in a post-default rating in the 'B' category or lower depending on private creditor participation,” the ratings agency said in a statement.
The “B” rating is only a few notches above the current CCC grade on Greece and it still considered “junk” or non-investment grade.
Greece will still be burdened by a large amount of debt outstanding, Fitch cautioned, and “its growth prospects are weak and its willingness to implement structural reforms may dissipate. That would restrict the potential for economic transformation and could undermine future public debt sustainability.
Moreover, Fitch said, the exact amount of public debt Greece would have after a voluntary bond exchange will depend on the details of the debt exchange, creditors' participation rate and any contingent liabilities in both the Greek financial and non-financial public sector.
EU officials have stated that with the imposition of the 50 percent write-down, it expected Greece’s debt-to-GDP ratio to fall to 120 percent by the year 2020 from the current level of 160 percent.
Fitch estimates that this forecast would imply a participation rate of about 85 percent on an estimated 210 billion euros ($297 billion) of private holdings of Greek government bonds.
“There are a number of reasons why a 50 percent write down of Greek government bonds will not translate into a comparable reduction in the overall public debt stock,” Fitch said.
“Official creditors - other euro area member state, the [International Monetary Fund] IMF and the [European Central Bank] ECB -- currently hold over one-third of Greek public debt and are not expected to participate in the debt exchange.”
In addition, the expected benefits of debt lowering would be offset by “the escalation in potential contingent liabilities for the government,” Fitch warned.
The ratings agency explained that Greek bank and non-bank institutions are heavily exposed to the sovereign and would sustain substantial losses on a 50 percent debt write- down.
Fitch believes that after the debt exchange is completed, Greece's public debt-to-GDP-ratio would peak at 142 percent in 2013 (by far the highest in the Eurozone), before falling to 120 percent by 2020.
Fitch added that it recognizes “the significant challenges that the Greek sovereign will continue to face following the proposed debt exchange, against a backdrop of anemic growth, austerity fatigue—possibly reducing the capacity to implement tough but necessary structural reforms—and continuing high debt levels.”