Gone are the days when rating agencies couched the big fat inconvenient truth in big words and wordy phrases like "Selective Default" (predicated upon 90% acceptances of effective bond tender offers, which as has now become clear is not happening) when discussing Greece. French-owned Fitch let the genie out of the bottle this morning when it announced that it now expects Greece to "probably default" (as in the real deal, not some transitory paper definition), "but not leave the Eurozone." In other words, we have replaced one wishful thinking (partially default) with another (full default, but partial implications). Because unfortunately as most know, there is no charter precedent for keeping a bankrupt country in the EU and currency union. Which means eurocrats are now scrambling to not only lay the liquidity groundwork for a Greek bankruptcy (which they did last week with the global USD liquidity lines, which also conveniently lay out the timing for such an event) but also changing the laws furiously behind the scenes to make sure a Greek default does not violate some European clause, which it certainly will. All of this ignores the fact that the financial aftermath of a Greek default will hit the credibility of the ECB more than anything else. How bureaucracy can provision for that we are not too clear.
Greece will probably default but will not leave the euro zone, Fitch credit ratings agency said on Tuesday, as pressure increased on the Greek government to push through with fiscal reforms.
International lenders told Greece on Monday it must shrink its public sector to avoid running out of money within weeks.
While widely expected, a Greek default would further unsettle already nervous financial markets, fuelling fears a precedent had been set for other struggling euro zone states and sending yields on other peripheral bonds sharply higher.
However, Fitch did not expect Greece to leave the euro zone, as some in markets have speculated in recent weeks.
"Concerns over the risk of a break-up of the euro zone are greatly exaggerated," David Riley, Fitch's head of global sovereign ratings said in a news release.
Fitch also said it did not expect any systematically important financial institution or sovereign to be allowed to default.
Contagion fears have put the spotlight on Italy and Spain's finances and yields on their benchmark bonds remain high despite austerity measures and regular European Central Bank purchases in the bond market over the past month.
Of course, once Greece sets the precedent that default is ok, and when Ireland, Portugal, and ultimately Italy, decide to use that approach, and recalling that French banks are on the hook for €410 billion to Italy alone, we wonder what French Fitch's opinion on that particular matter will be.