May 11 - The inconclusive outcome of Greece’s May 6 parliamentary elections and the subsequent failure to form a coalition government make fresh elections in June probable. The election or formation of a Greek government unwilling or unable to abide by the terms of the current EU-IMF programme would increase the risk of Greece leaving the eurozone. If they are required, the re-run elections will therefore be a critical event for both Greece and for the eurozone.
The implications for the eurozone of a Greek exit are highly uncertain and would depend on how it happens and the European policy response.
In the event of Greece leaving EMU, either as a result of the current political crisis or at a later date as the economy fails to stabilise, Fitch would likely place the sovereign ratings of all the remaining euro area member states on Rating Watch Negative (RWN) as it re-assessed the systemic and country-specific implications of a Greek exit.
This would be in line with the approach set out in Fitch’s report, ‘The Future of the Eurozone: Alternative Scenarios”. In the report, published 3 May, we said that if Greece left the eurozone, the ratings of those sovereigns currently on Negative Outlook - Cyprus, France, Ireland, Italy, Portugal, Spain, Slovenia and Belgium - would be at most immediate risk of a downgrade. The probability and magnitude of this would largely depend on the European policy response and its success in limiting contagion, as well as outlining a credible vision of a reformed EMU. Nonetheless, the sovereign ratings of all eurozone member states would potentially be at risk.
A Greek exit would break a fundamental tenet underpinning the euro - that membership of EMU is irrevocable. In a benign scenario, the spill-over and contagion to the rest of the eurozone could be less profound than feared and possibly provide the catalyst for greater fiscal and political integration that would strengthen the viability of Economic and Monetary Union.
The May 6 vote in Greece saw a rise in support for explicitly anti-austerity (although not necessarily anti-euro membership) parties, such as the left-wing Syriza, which rejects the terms of Greece’s EU-IMF programme. This came at the expense of the incumbent Pasok-New Democracy coalition, which fell two seats short of a parliamentary majority.
The outcome of re-run general election is unpredictable as the choice facing the Greek electorate is between parties that would implement highly unpopular fiscal austerity and structural reforms, and those political forces that reject the EU-IMF programme and would put at risk Greece’s membership of the eurozone. The May 6 poll and probable need for a second election have underlined the growing political risks to the successful implementation of the EU-IMF programme and financial support for Greece.
In the near-term, new elections in June would make it doubtful that Greece could comply with the EU-IMF’s end-June deadline to propose further medium-term austerity measures worth 5.5% of GDP, although we would expect Greece to be granted an extension to that deadline. However, we think any attempt by Greece to significantly renegotiate its agreed consolidation and reform programme (to which both Pasok and New Democracy are committed) would be unacceptable to the Troika of the ECB, Eurogroup and IMF, who appear unwilling to countenance a significant easing of the programme or any increase in funding.
Greece’s Long-Term foreign currency and local currency Issuer Default Ratings were moved to ‘B-'/Stable from ‘RD’ on 13 March 2012 following the completion of the distressed debt exchange that facilitated the provision of the country’s new EU-IMF programme.