Fitch calls default, Greece pledges no let-up on debt

Reuters) - Fitch ratings agency declared Greece would be in temporary default as the result of a second bailout, which Athens said had bought it breathing space.

But the agency pledged to give Greece a higher, "low speculative grade" after its bonds had been exchanged and said Athens now had some hope of tackling its debt mountain, which most economists still expect to force a deeper restructuring in the future.

An emergency summit of leaders of the 17-nation currency area agreed a second rescue package on Thursday with an extra 109 billion euros ($157 billion) of government money, plus a contribution by private sector bondholders estimated to total as much as 50 billion euros by mid-2014.

Under the bailout of Greece, which supplements a 110 billion euro rescue plan by the European Union and the International Monetary Fund in May last year, banks and insurers will voluntarily swap their Greek bonds for longer maturities at lower rates.

"Fitch considers the nature of private sector involvement... to constitute a restricted default event," said David Riley, Head of Sovereign Ratings at Fitch.

"However, the reduction in interest rates and extension of maturities potentially offers Greece a window of opportunity to regain solvency, despite the formidable challenges that it faces," he said.

The summit agreed the region's rescue fund, the European Financial Stability Facility, will be allowed to buy bonds in the secondary market if the European Central Bank deems that necessary to fight the crisis.

It can also for the first time give states precautionary credit lines before they are shut out of credit markets, and lend governments money to recapitalize banks, both moves which Germany blocked earlier this year.

German central bank chief Jens Weidmann was openly critical of the package, saying it shifted risks onto taxpayers in countries with stronger finances and weakened incentives for governments to keep their finances under control.

"This weakens the foundation for a currency union based on fiscal self-responsibility," said Weidmann, a European Central Bank policymaker, although he conceded the deal could help ease financial market tensions.

As part of the package, the euro zone leaders also made detailed provisions for limiting the damage of a temporary default -- the first in western Europe for more than 40 years.

"There is a great breath of relief for the Greek economy and this will gradually pass on to the real economy," Greek Finance Minister Evangelos Venizelos told reporters. "But by no means does this mean we can relax our efforts."

Riley told Reuters Greece may languish in default for only a few days and would likely get re-rated at single B or CCC.

Among other steps, the leaders agreed to ease terms on bailout loans to Greece, Ireland and Portugal; maturities will be extended to 15 years from 7.5 and interest cut to around 3.5 percent from 4.5-5.8 percent now.

Doubts remain about whether the plan went far enough to assure not only Greece's debt sustainability but that of Ireland, Portugal and other heavily indebted nations.

The package yielded "more than expected but not enough to make us sleep comfortably," Barclays economists said. They were disappointed that European leaders did not agree to expand a euro zone rescue fund.

The wider EFSF role is designed to prevent bigger euro zone states such as Spain and Italy from being shut out of markets because of fears of a weaker country defaulting.

Funds are sufficient so far but the burden could rise substantially. A precautionary credit line for a large country like Italy might total more than 500 billion euros over several years, overwhelming the EFSF's current 440 billion euros.

German Chancellor Angela Merkel said all euro zone debtors had to act decisively to repair their finances.

"Italy's austerity program was absolutely good. But it will be a process and demands further steps in the future," she told a news conference.