WRAPUP 8-Fitch calls default, Greece pledges no let-up on debt

* Fitch to slap "restricted default" status on Greece

* Says will assign non-default rating after bond exchange

* Greek finmin says no room for let-up on austerity

* Analysts question no expansion of rescue fund's size

(Adds German central bank chief criticising deal)

By Ingrid Melander and Patrick Graham

ATHENS/LONDON, July 22 (Reuters) - 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" 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 a second rescue package on Thursday with an extra
109 billion euros ($157 billion) of government money, plus a
contribution by private sector bondholders estimated to total as
much as 50 billion euros by mid-2014.

Under the bailout of Greece, which supplements a 110 billion
euro rescue plan by the European Union and the International
Monetary Fund in May last year, banks and insurers will
voluntarily swap their Greek bonds for longer maturities at
lower rates.

"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, 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.

German central bank chief Jens Weidmann was openly critical
of the package, saying it shifted risks onto taxpayers in
countries with stronger finances and weakened incentives for
governments to keep their finances under control.

"This weakens the foundation for a currency union based on
fiscal self-responsibility," said Weidmann, a European Central
Bank policymaker, although he conceded the deal could help ease
financial market tensions.

As part of the package, the euro zone leaders also made
detailed provisions for limiting the damage of a temporary
default -- the first in western Europe for more than 40 years.

"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."

Riley told Reuters Greece may languish in default for only a
few days and would likely get re-rated at single B or CCC.

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
percent from 4.5-5.8 percent now.

Doubts remain about whether the plan went far enough to
assure not only Greece's debt sustainability but that 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
euro zone rescue fund.

The wider EFSF role is designed to prevent bigger euro zone
states such as Spain and Italy from being shut out of markets
because of fears of a weaker country defaulting.

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 500 billion euros over several
years, overwhelming the EFSF's current 440 billion euros.

German Chancellor Angela Merkel said all euro zone debtors
had to act decisively to repair their finances.

"Italy's austerity programme was absolutely good. But it
will be a process and demands further steps in the future," she
told a news conference.

DEBT MOUNTAIN

French President Nicolas Sarkozy said the measures would
reduce Greece's debt by 24 percentage points of gross domestic
product from about 150 percent 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 percent in 2016 even
assuming that the full 50 billion euros 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."

Greek, Irish and Portuguese bonds jumped before
relinquishing their gains and 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 set to write
down the value of Greek bonds by 21 percent, with more losses
maybe 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
percent," said Gary Jenkins, head of fixed income research at
Evolution.

Shares in Europe's banks rose as it became apparent that the
major players had limited their losses on Greek bonds to just
over 5 billion euros.

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
had not stabilised their finances by 2013.

Many economists believe the only way out of the euro zone's
debt crisis in the long run may be closer integration of
national fiscal policies -- for example, a joint euro zone
guarantee for countries' bonds, or issuance of a joint euro zone
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 euro zone".

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.
(Writing by Mike Peacock; editing by Janet McBride/Ruth
Pitchford, Ron Askew)