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ATHENS/LONDON (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 recapitalize 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 program was absolutely good. But it will be a process and demands further steps in the future," she told a news conference.
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 privatization program.
"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 privatization 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 signaled 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 stabilized 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