July 6, 2015 / 4:12 PM / 2 years ago

Fitch: Greece Referendum Tips Balance Further Towards Euro Exit

(The following statement was released by the rating agency) LONDON, July 06 (Fitch) The "No" vote in Greece's referendum on Sunday dramatically increases the risk of a slide towards a disorderly Greek exit from the eurozone, Fitch Ratings says. An agreement between Greece and its official creditors remains possible, but time is short and the risk of policy missteps, or that the two sides simply cannot agree a deal, is high. The resignation of Finance Minister Yannis Varoufakis signals the Greek government's desire to re-engage with its official creditors, from whom stronger commitments on debt relief may be forthcoming following the expiry of the EFSF programme last week. But assuming they return to the negotiating table, the creditors are unlikely to make large concessions on policy conditionality up front. Their proposals may still be unacceptable to a Greek government emboldened by the referendum outcome. The lack of progress and loss of trust so far this year mean we think it will be a difficult to strike even a limited deal before 20 July, when EUR3.5bn of bonds held by the Eurosystem fall due. Solvency at Greek banks is very weak, with estimated combined group non-performing exposures for the four banks rated by Fitch above 40% at end-1Q15. These are likely to have deteriorated further since, making recapitalisation a more pressing priority. Solvency concerns may also make it difficult for the ECB to justify an increase in Emergency Liquidity Assistance (ELA), which has not been increased since 28 June, although it may identify an interim way of providing Greek banks with additional liquidity while negotiations continue. Without new funding, Greek banks may have to reduce the minimum daily deposit withdrawals below the EUR60 permitted under current capital controls. A missed payment to the ECB would therefore be a major event, primarily due to the possible reaction of the ECB's Governing Council, which may conclude that it cannot provide further ELA funding for Greek banks. Further tightening of bank liquidity by the ECB would be likely to push the banks into resolution and would make salvaging any potential deal extremely difficult. Missing the 20 July payment would not of itself trigger an 'RD' rating, as our 'CC' sovereign rating reflects the risk that Greece will not honour private debt obligations. Upcoming repayments to the private sector include Treasury Bills maturing this week and next, and a JPY11.67bn (EUR85m) bond maturing on 14 July. There are no formal provisions for leaving the eurozone, so a Greek exit would consist of a series of ad hoc measures. For example, the Greek government may have to issue IOUs rather than paying pensions and wages, effectively creating a parallel currency ('scrip'). An unplanned, reactive process could not be 'orderly' and would inflict severe damage on Greece's economy. But the risk that a Greek exit would trigger a systemic crisis in the eurozone has fallen in the last three years. The fiscal and current account positions, growth performance, and banking systems of other peripheral member states have improved, and the bloc has developed support mechanisms. Eurozone banks have reduced their Greek exposures, and bond market contagion has so far been limited. Nevertheless, a Greek exit would cause financial market volatility and dent economic confidence. It would increase the risk of future economic and financial crises, creating fears of another euro exit, with the attendant risks of higher sovereign borrowing costs and bank deposit withdrawals. This consideration may prompt a further acceleration in the eurozone authorities' continuing policy response to the eurozone sovereign debt crisis, as happened in 2012, if Greece does leave. Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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