Greece must secure an agreement to cut its debt burden in the next few days to prevent a “disorderly” default that could cause panic in its banking system and capital flight in nations from Portugal to Ireland, Fitch Ratings said.
The euro area’s most indebted country, facing a March 20 bond payment of 14.5 billion euros ($19 billion), failed to convince European finance ministers to deliver a 130 billion-euro bailout this week even after Greek Prime Minister Lucas Papademos and party chiefs agreed on fresh budget cuts.
“They must get this deal agreed really within the next few days to enable them sufficient time to do the paperwork and have the new bailout money disbursed before that bond is due,” Tony Stringer, a managing director at Fitch, said in a conference in Singapore today. “If they don’t manage to achieve that, then it could be in the realms of a disorderly default.”
Greece is insolvent and probably won’t be able to honor the bond payment in March, with efforts to arrange a private sector deal on how to handle Greece’s obligations constituting a default, Fitch Managing Director Edward Parker said last month. The rating company in July downgraded Greece to CCC, seven levels below investment grade.
Fate of Euro
Writedowns by bondholders on existing debt would prompt Fitch to cut Greek ratings to D, reflecting a default, Stringer said today.
“The manner of the default and whether Greece can stay in the euro zone are critically important too, to the future of the single currency,” Stringer said today. “If there is a negotiated agreement then we don’t think that’s going to be a particularly negative development for markets, it would be a positive development.”
A more severe default is still “by no means completely out of the question,” Stringer said, adding that even if funding were agreed on now, Greece may yet fail to deliver as they have done previously.
Europe’s hardline stance on Greece follows more than two years in which Greece repeatedly failed to carry through promised reforms to tackle its uncompetitive economy and meet the conditions for aid. Greece blamed its shortcomings on a recession deeper than first expected and which is now set to worsen with reports yesterday showing unemployment jumping to 20.9 percent in November and industrial production slumping.
“If there were a disorderly default at some stage, the biggest issue for us is contagion,” Stringer said. “There is likely to be panic both in the Greek banking system -- potential for rapid deposit flight, people withdrawing funds to transfer offshore -- but then equally the spotlight will turn to other peripheral sovereigns such as Portugal, Ireland and potentially Italy and Spain again.”
The rebuff from European finance ministers in holding back a rescue package for Greece this week has left lawmakers in Athens under government pressure to endorse a newly minted austerity plan or exit the euro. Facing general strikes and mounting opposition to cuts in wages, pensions and government spending, Greek Finance Minister Evangelos Venizelos said the parliamentary vote set to begin this weekend amounted to a ballot on euro membership.
“If Greece goes through disorderly default and potentially a euro-zone exit, there’ll be very dramatic consequences of asset valuations in that country,” Stringer said. “People might start getting nervous on some of the other countries and we could have a domino effect and see bank runs and capital flight across the other weaker sovereigns.”