Fitch: Greek Referendum Threatens Eurozone Financial Stability

by: Research Recap

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’ (NYSEARCA: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 – potentially a Greek exit from the euro. Both of which would have severe financial implications for the financial stability and viability of the eurozone.

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.