Greece’s plan to hold a referendum on Europe’s bailout for the nation poses a threat to financial stability in the region, Fitch Ratings said.
The vote “dramatically raises the stakes for Greece and the euro zone as a whole,” Fitch said in a statement today, adding that it increases the risk of a “disorderly” default.
Greek Prime Minister George Papandreou late yesterday called for a referendum on Europe’s plan to contain the country’s debt turmoil. Austerity measures by the government to reduce the deficit have eroded Papandreou’s popularity and sparked a wave of social unrest, while a poll published Oct. 29 showed most Greeks believe the new bailout package is negative.
A rejection of the European Union-International Monetary Fund plan “would increase the risk of a forced and disorderly sovereign default and -- whilst not Fitch’s central rating case -- potentially a Greek exit from the euro,” Fitch said. Both scenarios “would have severe financial implications for the financial stability and viability of the euro zone.”
Greek, Italian and Spanish bonds fell today and the euro dropped 1.7 percent against the dollar. Europe’s Stoxx 600 Index plunged 4.2 percent.
The bailout agreement at a summit in Brussels last week included persuading investors to write down half their holdings in Greek debt and increasing the euro region’s rescue fund. Fitch said the planned vote increases the uncertainty “around the losses that creditors may incur and hence bank recapitalization.”
“It is essential that there is rapid progress” in enhancing the firepower of the rescue fund and that the European Central Bank “stands ready to intervene in the secondary market to moderate the contagion,” Fitch said.
The Greek referendum will likely be held after details of the EU accord are wound up, Papandreou said. Forty-four percent of 1,009 people in Greece surveyed by Kapa Research SA on Oct. 27, the day the bailout agreement was announced, said the deal was negative. Another 15 percent said it was “probably” negative, according to the poll, published in To Vima newspaper.
Fitch said on Oct. 28 that the agreement on a 50 percent haircut on Greek bonds may create an event of default if investors accept it. While the accord is “a necessary step to put the Greek sovereign’s public finances on a more sustainable footing,” it will still face “significant challenges.”
The International Swaps and Derivatives Association said yesterday that the plans appear to involve “a voluntary exchange that would not be binding on all holders,” and so it “does not appear to be likely that the euro zone proposal will trigger payments under existing credit-default swap contracts.”
Fitch said it is “highly uncertain” what the consequences of a Greek rejection of the aid plan would be.
“In light of the prolonged and difficult negotiations” between Greece, the IMF and the EU, “securing agreement on a new package could prove unobtainable,” it said. “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.”
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