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Fitch's Downgrades Greece to "Restricted Default" After Bond Swap

ATHENS – The deal in which Greece forced investors to take 74 percent losses so that the country could write down $134 billion in debt came with a price: being declared unsafe for creditors. The Fitch ratings agency downgraded Greece to “restricted default” after the deal, in which those who refused to agree were forced to take losses when Greece activated a so-called Collective Action Clause. The declaration was expected after the two other major ratings agencies, Moody’s and Standard & Poor’s, also downgraded Greece to default, but it didn’t dampen the mood among government officials nor seem to affect the markets.
Fitch said the downgrade was necessary as the exchange constituted a sovereign default under the agency’s distressed debt exchange rating criteria. S&P’s move made the country the first euro-zone member to be officially rated in default 13 years after the single European currency was adopted in what was supposed to a be project to strengthen the European Union.
Still, Reuters reported that some hedge funds have found a legal loophole they believe will force Greece to repay some of its debt in full, three sources close to the matter said, in a move that would intensify the standoff between the country and its debtors. Because of a provision written into one particular bond, some hedge funds believe that Athens has already defaulted on that bond by asking bondholders to exchange their debt for new paper with a much lower value, according to the sources.
The funds are now trying to buy up enough of the bond — issued by state-owned Hellenic Railways and guaranteed by the government — to force Greece to repay them in full, about 400 million euros, or some $525 million. If Greece refuses to do so, this may trigger similar provisions on other Greek railway bonds, potentially landing Athens with a bill of about $4.4 billion, with investors demanding immediate repayment, the sources said. However, it is unlikely the hedge funds could derail the overall debt swap, a crucial precondition for receiving a second bailout from the European Union-International Monetary Fund-European Central Bank (EU-IMF-ECB) of $172 billion to stave off default and stay in the Eurozone of countries using the euro as a currency.
Greek Finance Minister Evangelos Venizelos, who said Greece shouldn’t be expected to pay its debts, said speculators who try to use the loophole or hedge funds who took out insurance against the default won’t get a cent.  He described the completion of the offer for Greek bondholders to accept a major reduction in the amount they are owed as presenting Greece with a “window of opportunity” to exit the crisis.
Venizelos was speaking after Athens confirmed that 95.7 percent of its privately-held bonds would undergo a haircut of 53.5 percent on their face value. “We owe it to our children and grandchildren to rid them of the burden of this debt,” he said. Venizelos said that the government’s target must now be to conduct structural reforms and “fix the injustices,” including the still rampant tax evasion costing the country more than $60 billion the government hasn’t curtailed.
He said that those investors who did not voluntarily take part in the bond swap would be “foolish” to believe that they will be able to claim the full value of their investments, including Greek pension funds who held $4.4 billion in what became worthless Greek bonds once the swap was completed. The deal with investors writes down the interest rate as well and gives Greece 30 years to pay them back.
While some investors indicated they will sue, Greece said it didn’t care and German Finance Minister Wolfgang Schaeuble said, “The agreement with private creditors on the Greek debt swap is a big step towards stabilization and consolidation to a sustainable level of debt, which gives Greece a great opportunity.” European Economic Affairs Commissioner Olli Rehn said, “That contribution by the private sector is an indispensable element to ensure the future sustainability of the Greek public debt.”

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