Fitch Downgrades Greece due to Heightened Risk of Exiting EMU

Fitch Ratings has downgraded Greece’s long-term foreign and local currency issuer default ratings (IDRs) to CCC from B-. The short-term foreign currency IDR has also been downgraded to C from B. At the same time, the agency has revised the country ceiling to B-.

The downgrade of Greece’s sovereign ratings reflects the heightened risk that Greece may not be able to sustain its membership of Economic and Monetary Union (EMU). The strong showing of ‘anti-austerity’ parties in the 6 May parliamentary elections and subsequent failure to form a government underscores the lack of public and political support for the EU-IMF €173bn programme.

In the event that the new general elections scheduled for 17 June fail to produce a government with a mandate to continue with the EU-IMF programme of fiscal austerity and structural reform, an exit of Greece from EMU would be probable. A Greek exit would likely result in widespread default on private sector as well as sovereign euro-denominated obligations, despite a moderate sovereign debt service burden following the restructuring of Greek government bonds in March.

Fitch previously assigned a single AAA country ceiling across all Euro Area Member States (EAMS) reflecting the very low risk of transfer and convertibility controls being imposed within EMU and on euro-denominated debt. With exit from EMU a material and rising risk, Fitch has revised the country ceiling to B- for Greece, which effectively imposes a cap on the ratings of all issuers and transactions domiciled in Greece. In the event of a Greek exit from EMU, Fitch would treat the forcible re-denomination of sovereign and private sector debt into a new Greek currency as a default event in line with its distressed debt exchange rating criteria.

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