Fitch: Greek brinkmanship could do lasting economic damage

Continued brinkmanship in the negotiations between the Greek government and its official creditors has increased risks to Greece's sovereign credit profile, Fitch Ratings says. The impact on Greece's sovereign finances remains unclear, but the resulting uncertainty is amplifying the economic damage caused by falling confidence.



Press reports on Wednesday suggested that Greece ('B'/Negative) 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 Monday's 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.



We think 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 (EUR7.2bn 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 echoes 2012, when around 30% of deposit outflows from Greek banks in May and June were not recovered in 2H, 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.



We expect to lower our forecast for real GDP growth in 2015 again, to reflect the risk of Greece re-entering recession. We reduced it by 1pp, to 1.5%, between our December and January sovereign ratings reviews.



Rising funding and liquidity risks led us to put four Greek banks on Rating Watch Negative on 10 February. This reflected our view that difficult negotiations would prompt further deposit outflows that could trigger capital controls, particularly if access to emergency funding were restricted by the European Central Bank. The ECB has already signalled that it may take a strict approach by lifting its waiver early on the eligibility of Greek government and government-guaranteed bonds in the Eurosystem's monetary policy operations. ECB-sanctioned funding via the emergency liquidity assistance provided by Greece's central bank is reviewed regularly (next on 18 February).



An agreement would probably ultimately lead to a re-profiling of Greece's obligations to the official sector ("Official Sector Involvement", OSI). Face-value haircuts look less likely. Fitch's sovereign credit ratings reflect the likelihood of a default on debt to private sector creditors. In the event of OSI, the ratings would not be affected in the same way as during Greece's 2012 debt restructuring, which took the form of "Private Sector Involvement" or PSI. We downgraded Greece's IDRs to 'RD' ('Restricted Default') in March 2012, because the exchange of government bonds constituted a sovereign default event under our distressed debt exchange rating criteria.



We consider PSI less likely in 2015 because less than 20% of Greece's debt stock is held by private-sector creditors, so the benefits would be limited. The sovereign ratings implications of OSI would depend more on the overall impact on Greek sovereign debt sustainability, which could be positive - although as we have previously noted the impact may be limited by the concessional and long-dated nature of Greece's existing official sector debt.