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GreekReporter.comGreek NewsEconomyFitch: Greek Referendum Poses a Threat to the Eurozone's Financial Stability

Fitch: Greek Referendum Poses a Threat to the Eurozone's Financial Stability

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.

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