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Athens/London - 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" rating 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 on a second rescue package on Thursday with an extra €109bn of government money, plus a contribution by private sector bondholders estimated to total as much as €50bn by mid-2014.
Under the bailout of Greece, which supplements a €110bn rescue plan by the European Union and the International Monetary Fund (IMF) in May last year, banks and insurers will voluntarily swap their Greek bonds for longer maturities at lower rates to help Athens.
"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 (EFSF), 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 recapitalise banks, both moves which Germany blocked earlier this year.
As part of the package, the eurozone leaders also made detailed provisions for limiting the damage of a temporary default - the first in the euro's 12-year history.
"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."
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% from 4.5% - 5.8% now.
Doubts remain about whether the plan went far enough to assure the debt sustainability not only of Greece but also 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 eurozone rescue fund.
The expanded EFSF role is designed to prevent bigger eurozone states such as Spain and Italy from being excluded from markets because of fears of a weaker country defaulting.
Existing 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 €500bn over several years, overwhelming the EFSF's current €440bn.
Debt mountain
French President Nicolas Sarkozy said measures agreed at the summit would reduce Greece's debt by 24 percentage points of gross domestic product (GDP) from about 150% today.
That still leaves a colossal debt for an economy deep in recession with no recourse to a competitive devaluation.
What is more, the figures are based on what analysts say are optimistic projections for growth and returns from a sweeping privatisation programme.
"Our estimates suggest that Greek debt/GDP ratios will fall around 25 percentage points over 5 years as a result of these measures but will still be a whopping 120% in 2016 - even assuming that the full €50bn of privatisation measures are implemented," analysts at JP Morgan said.
"We therefore believe that (bond) spreads will widen again as short covering dissipates and reality sinks in."
The euro brushed close to a two-week high, prices for Greek, Irish and Portuguese bonds jumped, and the cost of insuring their debt tumbled on Friday. But traders said expectations of a larger restructuring down the road were undimmed.
The European leaders' promise of a "Marshall Plan" of European public investment to help revive the Greek economy may help, though details were thin.
Ratings agencies Standard & Poor's and Moody's are likely to follow Fitch's lead since banks and insurers are expected to write down the value of Greek bonds by about 20%, with possibly more losses to follow.
"We have long thought that the most likely outcome for Greek bondholders would be that they would take a small haircut first, followed by a larger one at a later date. To give Greece a fighting chance they probably need a write-down close to 65%," said Gary Jenkins, head of fixed income research at Evolution.
The summit accord was based on a common position crafted by Merkel and Sarkozy in late night talks in Berlin on Wednesday with ECB president Jean-Claude Trichet.
The ECB relented and signalled it was willing to let Greece default temporarily, as long as it was strictly a one-off.
But Fitch said it would expect similar private creditor involvement in any future help for Ireland and Portugal if they have not stabilised their finances by 2013.
Many economists believe the only way out of the eurozone's debt crisis in the long run may be closer integration of national fiscal policies - for example, a joint eurozone guarantee for countries' bonds, or issuance of a joint eurozone bond to finance all countries. Germany has opposed this.
Sarkozy, at least, is looking to more sweeping reforms.
He said France and Germany would make proposals by the end of August on how to improve the governance of the bloc, to "clarify our vision of the future of the eurozone".
Merkel said she would not allow a union of automatic transfers from richer to poorer states. "This shall not happen according to my conviction," she told a news conference.
But the agency pledged to give Greece a higher, "low speculative grade" rating 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 on a second rescue package on Thursday with an extra €109bn of government money, plus a contribution by private sector bondholders estimated to total as much as €50bn by mid-2014.
Under the bailout of Greece, which supplements a €110bn rescue plan by the European Union and the International Monetary Fund (IMF) in May last year, banks and insurers will voluntarily swap their Greek bonds for longer maturities at lower rates to help Athens.
"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 (EFSF), 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 recapitalise banks, both moves which Germany blocked earlier this year.
As part of the package, the eurozone leaders also made detailed provisions for limiting the damage of a temporary default - the first in the euro's 12-year history.
"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."
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% from 4.5% - 5.8% now.
Doubts remain about whether the plan went far enough to assure the debt sustainability not only of Greece but also 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 eurozone rescue fund.
The expanded EFSF role is designed to prevent bigger eurozone states such as Spain and Italy from being excluded from markets because of fears of a weaker country defaulting.
Existing 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 €500bn over several years, overwhelming the EFSF's current €440bn.
Debt mountain
French President Nicolas Sarkozy said measures agreed at the summit would reduce Greece's debt by 24 percentage points of gross domestic product (GDP) from about 150% today.
That still leaves a colossal debt for an economy deep in recession with no recourse to a competitive devaluation.
What is more, the figures are based on what analysts say are optimistic projections for growth and returns from a sweeping privatisation programme.
"Our estimates suggest that Greek debt/GDP ratios will fall around 25 percentage points over 5 years as a result of these measures but will still be a whopping 120% in 2016 - even assuming that the full €50bn of privatisation measures are implemented," analysts at JP Morgan said.
"We therefore believe that (bond) spreads will widen again as short covering dissipates and reality sinks in."
The euro brushed close to a two-week high, prices for Greek, Irish and Portuguese bonds jumped, and the cost of insuring their debt tumbled on Friday. But traders said expectations of a larger restructuring down the road were undimmed.
The European leaders' promise of a "Marshall Plan" of European public investment to help revive the Greek economy may help, though details were thin.
Ratings agencies Standard & Poor's and Moody's are likely to follow Fitch's lead since banks and insurers are expected to write down the value of Greek bonds by about 20%, with possibly more losses to follow.
"We have long thought that the most likely outcome for Greek bondholders would be that they would take a small haircut first, followed by a larger one at a later date. To give Greece a fighting chance they probably need a write-down close to 65%," said Gary Jenkins, head of fixed income research at Evolution.
The summit accord was based on a common position crafted by Merkel and Sarkozy in late night talks in Berlin on Wednesday with ECB president Jean-Claude Trichet.
The ECB relented and signalled it was willing to let Greece default temporarily, as long as it was strictly a one-off.
But Fitch said it would expect similar private creditor involvement in any future help for Ireland and Portugal if they have not stabilised their finances by 2013.
Many economists believe the only way out of the eurozone's debt crisis in the long run may be closer integration of national fiscal policies - for example, a joint eurozone guarantee for countries' bonds, or issuance of a joint eurozone bond to finance all countries. Germany has opposed this.
Sarkozy, at least, is looking to more sweeping reforms.
He said France and Germany would make proposals by the end of August on how to improve the governance of the bloc, to "clarify our vision of the future of the eurozone".
Merkel said she would not allow a union of automatic transfers from richer to poorer states. "This shall not happen according to my conviction," she told a news conference.
