A Greek debt swap or rollover would probably be considered a default and prompt a cut in its sovereign rating to C, while Ireland and Portugal's ratings would immediately be subject to review, Fitch said on Thursday.
David Riley, Fitch's head of sovereign ratings, told Reuters in an interview it was hard to imagine what would motivate bondholders to agree to a debt rollover or maturity extension.
A debt exchange in which private bondholders voluntarily participate has been flagged as one possible way to secure funding for heavily indebted Greece while avoiding a default.
Earlier this week, German Finance Minister Wolfgang Schaeuble called for a "substantial contribution" to supporting Greece from holders of its debt. He suggested in a letter to the International Monetary Fund and other lenders that maturities on outstanding Greek debt be extended by seven years.
Riley said Fitch had not seen the letter, but based on its reported content, the rating agency would probably consider it a "distressed debt exchange" and therefore a default.
"It's hard to envisage the motivation for bondholders to do that (a debt swap), given that it would potentially imply (an) economic loss for them," Riley said on the sidelines of a financial seminar.
"Given that you particularly target a certain group of bondholders — those who hold debt with a maturity for a certain period of time — that could be a de facto view of a retrospective change in the terms of those securities.
"If that were the case, we would likely view that as a distressed debt exchange and therefore an event of default."
Riley warned a definite conclusion could only be drawn once the details are known of a new EU/IMF programme which is currently in the works. He said Fitch was waiting for the conclusions of EU summits in late June and for the decision of the IMF board, which he expected in early July.
He said the concern was there would be "implicit or explicit sanction" for those who participate in the debt exchange or an "implicit or explicit subordination of those who don't participate, in terms of their rights".
If that was the case, Greece would immediately be cut to C from its current B+ and the ratings agency would place its fellow bailout-recipients Ireland and Portugal on review.
OTHER COUNTRIES AT RISK
Involving the private sector in Greek aid before 2013 "would be a very significant shift in the European policy response," Riley said. "Certainly for those countries that have EU/IMF programmes it is something that we would need to take into account."
Riley later told reporters it was positive for Ireland and Portugal that their aid programmes "were more fully funded" than Greece's, but Fitch's concern was that a Greek default would make it more difficult for the two countries to exit those programmes.
The review may not necessarily lead to a downgrade, he said.
He said Spain, seen by many as the country most at risk of contagion from the Greek crisis, "had not yet fully detached" itself from the problems of Greece, Ireland and Portugal.
However, developments in Spain have been largely in line with Fitch's expectations and the ratings agency sees no reasons to take a closer look at its situation for now, he said.
He also said countries were not generally rated as being in default for too long. "We start the clock again and rate the sovereign according to its new financial situation," Riley said.
