Greece’s plan to hold a referendum on its proposed debt restructuring dramatically raises the risk of a Greek default and its exit from the European Union, says Fitch Ratings.
The rating agency warns that if the EU-International Monetary Fund program, which was recently negotiated by the Greek government, was to be rejected it would increase the risk of a forced and disorderly sovereign default by Greece, and possibly its exit from the euro. Both of these results would have severe financial implications for the financial stability and viability of the eurozone, it warns.
“The announcement of a referendum late Monday underscores the urgency of establishing a credible firewall to prevent contagion from Greece destabilising the eurozone,” it says. And, the uncertainty over whether Greece will accept the EU-IMF program also increases the uncertainty around the losses that creditors may incur, and therefore the extent of bank recapitalization that is required in the region.
Fitch says that in its opinion, it is essential that there is rapid progress in making the enhanced ‘firepower’ of the European bailout fund operational, and that the European Central Bank 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 the consequences of a no vote would be, it adds. “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,” it warns.