Fitch Warns of Lasting Damage from Greek Brinkmanship

Continued brinkmanship in the negotiations between the Greek government and its official creditors has increased risks to Greece’s sovereign credit profile, says Fitch Ratings.

According to the credit ratings agency (CRA) the impact on Greece’s sovereign finances remains unclear, but the resulting uncertainty is amplifying the economic damage caused by falling confidence.

Latest press reports suggested that Greece would request an extension of official financing beyond the expiry of its current programme at end-February. It remains uncertain whether terms can be agreed with the other eurozone member states after the February 16 meeting of finance ministers ended without agreement.

“Our base case remains that the incentives to reach a negotiated agreement are sufficiently strong, but the risks of a policy mistake on either side have risen,” Fitch commented.

The CRA also believes that the onus will be on the Greek government to compromise. Official creditors will be reluctant to set a precedent for programme countries to receive funding support without what they consider appropriate conditionality.

The longer an agreement takes, the greater the risk that disbursement of funds to the Greek sovereign is delayed (€7.2bn is potentially available from the re-branded ‘Institutions’ if the outstanding review under the current programme is successfully completed).

The damage to investor, consumer, and depositor confidence is increasing downside risks to growth and Greece’s incipient economic recovery. It may take time to repair even if agreement with official creditors is reached in the coming days or weeks.

This potential scenario echoes 2012, when around 30% of deposit outflows from Greek banks in May and June were not recovered in the second half of that year, even as fears that Greece would leave the eurozone receded. The private sector also experienced a long period of limited or costly access to market financing.

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