Legislation is expected to be put in place next week for a new five-year Greek austerity plan that would deliver another €12 billion ($17 billion) of aid to the country, which faces the possibility of defaulting. 

However, the bailout is contingent on an austerity plan that would mean Greece would have to enact deep spending cuts, more tax hikes and a major sell-off of state assets.  This week the Greek parliament will be voting on these austerity measures in two bills — a €28 billion ($39.8 billion) midterm austerity plan and an implementation law, according to a report by the Associated Press.

There has also been some discussion that Greece is looking to restructure or rollover existing debt with a different type of bond to avoid the obligations from a declaration of default by the credit rating agencies. 

Fitch Ratings said in a report that a restructuring or rollover event for Greek sovereign debt would not necessarily result in the agency taking further rating actions on Greek structured finance securities, but will likely trigger downgrades of Greek covered bond ratings.

"Once a euro zone sovereign's IDR has been downgraded well below investment grade, a further downgrade, or even some form of sovereign default, may not necessarily indicate a further increase in the risk associated with the structured finance securities from that country," the Fitch report explained. "By design, securitization structures are intended to be able to withstand severe stresses to their operating environment and therefore additional adverse sovereign rating action will not necessarily result in corresponding downgrades to associated structured finance notes."

However, Fitch said its structured finance or covered bond ratings will exceed the IDR of the relevant euro zone sovereign if the country's financial payment system will continue to operate, without interruption, at all times throughout the lives of the transactions and their underlying pools of assets.

"Continuity of a country's fundamental financial infrastructure requires financial institutions to function as expected, allowing payments to be made between the parties to all loan and issuance documentation," Fitch said. "It is possible that a country's payment system will continue to operate throughout a period in which the debt obligations of the sovereign and even individual financial institutions undergo some form of restructuring, particularly if such events are anticipated and overseen in an orderly manner by external parties such as the International Monetary Fund (IMF)."

Fitch expects that even in the event of some form of Greek sovereign debt restructuring or default, the financial payment system would continue to operate sufficiently for the cashflows in securitizations to be maintained and payments made as required.

Greek covered bonds, on the other hand, maintain their explicit link with the IDR of the respective issuers and thus indirectly to the sovereign IDR. Any further negative rating action on the Greek sovereign would affect covered bonds to the extent that the IDRs of the respective Greek banks are affected.

As a result, Fitch would be likely to downgrade the IDR of the five major Greek banks to within the 'B' to 'C' range and the ratings of covered bonds from these institutions would likely be downgraded to sub-investment grade, based on the current features of the programs.

The domino effect from a potential Greece default would affect other European banks. "This would affect U.S. banks, which would affect stock prices, which would affect credit spreads, which would affect the ability for a U.S. borrower to get a new mortgage, which I guess leads back to a borrower performing worse," said Jesse Litvak, a managing  director at Jefferies  in an  industry note.

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