In what constitutes an anticlimactic moment of sorts, Fitch Calls Greece Default.

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.

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.

Given that nothing has been solved, the climax of this saga has still not yet been seen. The deal still requires every member nation to approve changes to the Maastricht Treaty, which may not happen. Moreover, Greece is just the first of many nations to test the system. Ireland, Portugal, Spain, and Italy are waiting on deck. Finally, will German taxpayers go along with a plan their own central bank is highly critical of?

Mike “Mish” Shedlock
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