PARIS (MNI) – Fitch Ratings Friday issued the following statement
in which it made clear that if the recently decided 50% haircut on the
value of privately-held Greek sovereign debt is accepted by banks, it
would constitute a credit event:
“The framework commitments agreed at the Euro Area Heads of State
summit yesterday represent a positive step towards supporting financial
stability in the euro zone, although their effectiveness will depend on
greater clarity on the details of the various initiatives announced as
well as full and timely implementation.
The nature of the Heads of State summit and the political and
technical complexity of the issues at hand inevitably meant that a
detailed set of proposals was unlikely to emerge. However, Fitch
believes the main elements of the announced policy measures
appropriately target the key causes of the recent intensification of the
euro area crisis and the agency views the broad framework agreement on
key principles as a positive outcome of the summit.
The agreement to materially increase the size of the EFSF’s lending
capacity to around EUR1trn is a critical first step to enhance market
confidence in the ability of policy-makers to limit the risk of
contagion spreading to the core euro area countries. More detail is
needed to assess the viability of the two options being considered
(providing credit enhancements to sovereign bonds and/or setting up one
or more special purpose vehicles to finance its operations) particularly
with regards to their structure, financing sources and implementation.
Given this level of uncertainty and until the viability of these
options can be assessed, Fitch views as critical the role of the ECB in
continuing to intervene in the secondary market for euro area sovereign
bonds, and ultimately to be ready to act as a lender of last resort to
solvent but illiquid sovereigns issuers. However, overall Fitch views
positively the evidence that the Euro Area Member States (EAMS) have
reached agreement on the need for an enhanced support mechanism.
In the meantime, Fitch has assigned a ‘AAA(exp)’ expected rating to
the EFSF’s amended guaranteed debt issuance programme following formal
approval by all 17 EAMS of the amended Framework Agreement governing its
operations that was announced at the Euro Area Summit on 21 July (see
‘Fitch Assigns Amended EFSF Guaranteed Debt Programme ‘AAA(exp)’ Rating’
dated 28 October at www.fitchratings.com for further details). The
agency will assess the implications of the potential changes to the EFSF
once more detailed information becomes available.
The provisional agreement on private sector involvement (PSI) for
Greece (‘CCC’) is a necessary step to put the Greek sovereign’s public
finances on a more sustainable footing, notwithstanding that – if
accepted – the 50% nominal haircut on the proposed bond exchange would
be viewed by the agency as a default event under its Distressed Debt
Exchange criteria. However, Fitch recognises the significant challenges
that the Greek sovereign will continue to face following the proposed
debt exchange, against a backdrop of anaemic growth, austerity fatigue –
possibly reducing the capacity to implement tough but necessary
structural reforms – and continuing high debt levels, with government
debt to GDP remaining well over 100% even in a positive scenario (see
“Fitch: Greek 50% Haircut Would Keep Sovereign’s Rating Low” dated 28
October at www.fitchratings.com for further details). Fitch also views
with some caution the apparent commitment to increase the Greek
privatisation programme by an additional EUR15bn, given the already
ambitious nature of the existing EUR50bn programme.
Fitch welcomes the commitment to raise the core Tier 1 capital
ratio of EU banks to 9% by June 2012, which the European Banking
Authority (EBA) estimates would require increased capital of EUR106bn.
This is an important step towards enhancing confidence in the euro area
financial system. Plans to “urgently explore” the options for providing
state guarantees for term funding for banks could also support market
confidence while helping to prevent excessive de-leveraging by banks
trying to increase their capital ratios. As with the EFSF proposals,
more detail will be required to undertake a comprehensive analysis of
the implications of this initiative.
In addition to the main elements of the announced policy measures
outlined above, Fitch views positively the further commitments to fiscal
discipline and structural reform by euro area sovereigns under financing
pressures as well as measures to strengthen economic discipline,
governance and co-ordination, given that such commitments appropriately
target some of the key causes of the euro area crisis.
Parallels with the Euro Area summit of 21 July, when a warm
afterglow of confidence quickly dissipated, underline the importance of
rapid and full implementation of the policy commitments. The July summit
also included commitments to enhance the net lending capacity and
operational flexibility of the EFSF (recently ratified by all 17 EAMS),
a new EU-IMF programme for Greece coupled with private sector
involvement in a debt restructuring agreement, commitments by euro area
sovereigns to fiscal discipline and structural reforms, and a
strengthening of euro area surveillance and governance.
Moreover, until there is a broad-based economic recovery across the
euro area, progress on reducing government budget deficits and
stabilising and then reducing government debt ratios, and structural
reforms to enhance competitiveness and long-term potential growth within
the euro area, further bouts of financial market volatility appear
likely and downward pressure on sovereign ratings will persist.”
–Paris Newsroom, +331=42-71-55-40; bwolfson@marketnews.com
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