The EU and the IMF need to put up substantially more aid for Greece beyond 2013 to ensure the overborrowed country will have enough time to work its way back to solvency and avoid a default, Fitch said on Tuesday.
The European Union is racing to draft a second bailout package for Greece. EU officials said a new 65 billion euro (56 billion pound) plan could involve collateralised EU/International Monetary Fund loans and additional revenue measures to plug funding gaps in 2012-2013.
"Additional financial support for Greece would only provide a credible path to solvency if it were fully funded beyond the end of the current programme in May 2013," Fitch said in a report on Tuesday.
"An increase of 90-100 billion euros could meet Greece's funding needs through to the end of 2014, potentially buying it sufficient time to put necessary reforms in place to enhance public debt sustainability," it said.
Fitch argues that such new commitments would take the risk of sovereign default off the table until 2015 and would send a strong message lenders are prepared to stand solidly behind Greece beyond the 110 billion euro bailout agreed in May 2010.
Fitch says this alternative scenario is "purely illustrative" and would also require strong privatisation receipts and Greece sticking to current fiscal targets.
It said Athens' official creditors would potentially end up holding some 80 percent of Greece's debt if the country managed in the same time to complete its 50 billion euro privatisations.
Fitch cut Greece's sovereign rating by three notches to B+ earlier this month and said in the report on Tuesday that it plans to conclude a fresh review of the rating when the EU and the IMF report on their ongoing review of Greece.
It said an extended and fully funded IMF/EU programme, without burdening private bondholders, could lead to an affirmation of the B+ rating.
"In the absence of a fully funded and credible IMF/EU programme, Greece's sovereign ratings would likely be downgraded to the CCC category, indicating that a Greek sovereign debt default was highly likely some time in 2012," it said.
Fitch reiterated in the report that it considers that any extension of maturities on existing sovereign bonds would be treated as a default event.
REUTERS
