Fitch Ratings says that the announcement by the Prime Minister of Greece of a public referendum to approve the economic and financial conditions associated with the new EU-IMF programme, including the debt restructuring under the 'private sector involvement' (PSI), dramatically raises the stakes for Greece and the eurozone as a whole.
Fitch Ratings says that the announcement by the Prime Minister of Greece
of a public referendum to approve the economic and financial conditions
associated with the new EU-IMF programme, including the debt restructuring
under the 'private sector involvement' (PSI), dramatically raises the stakes
for Greece and the eurozone as a whole.
A rejection of the EU-IMF programme recently negotiated by the Greek government
would increase the risk of a forced and disorderly sovereign default and -
whilst not Fitch's central rating case (see 'The Euro Area Financial Crisis -
How Does it End?', 20 September) - potentially a Greek exit from the euro. Both
of which would have severe financial implications for the financial stability
and viability of the eurozone.
The announcement of a referendum late Monday underscores the urgency of
establishing a credible firewall to prevent contagion from
Greece
destabilising the eurozone. The uncertainty over whether
Greece
will
accept the EU-IMF programme and PSI also increases the uncertainty around the losses
that creditors may incur and hence bank recapitalisation.
In Fitch's opinion, it is essential that there is rapid progress in making
operational the enhanced 'firepower' of the EFSF and that the ECB stands ready
to intervene in the secondary market to moderate the contagion to solvent but
potentially illiquid sovereigns, notably Italy and Spain.
It is highly uncertain what would be the consequences of a no vote. In light of
the prolonged and difficult negotiations between the Greek government and the
'troika' of the IMF, European Commission and ECB, securing agreement on a new
package could prove unobtainable. Given the heavy debt repayment schedule in
the first quarter of 2012, without continuing external financial support, a
coercive and potentially disorderly sovereign default could follow.
Failure to provide a comprehensive and credible response to the Greek crisis
has been a source of contagion and financial instability and has heightened
downward pressure on the ratings of other eurozone sovereigns.
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