The direct impact on other countries would likely be limited should Greece leave the eurozone, but the indirect impact on some of the region’s banks could be severe, warns a new report from Fitch Ratings.
The rating agency says in its report that a hypothetical Greek exit would have limited direct, cross-border impact on neighbouring countries, and the direct impact on most eurozone banks would be modest. However, Fitch says it believes the indirect impact of a Greek redenomination on banks throughout the eurozone “could be severe”, most notably in countries that are under their own fiscal strains, including Spain and Italy.
“A robust response from policymakers would be required to prevent contagion, and Fitch would expect a strong public statement of commitment by the [European Central Bank] and eurozone policymakers to provide support, if required,” it says, adding that such a statement would need to be backed up by specific policy actions.
“The willingness to extend a €100 billion credit line to Spain to support its banks is a clear sign of policymakers’ willingness to do what is necessary,” it notes.
Fitch says that the impact on Eurozone banks’ credit ratings would depend on the effectiveness of the policy response. “Banks in Portugal and Ireland are more vulnerable to contagion risks as these nations could be perceived “next in line” for a euro exit. If the EU policy response fails to control contagion risks and if bank runs and capital flight were to become a reality, banks in these countries would be under severe stress,” it says.
“Banks in the stronger eurozone countries under the most rating pressure from a Greek exit would be those with the weakest funding profiles and the highest direct exposure to peripheral countries,” it adds.
Fitch says a Greek exit is not its base case scenario, but a second Greek election on June 17, and the increasing possibility that a populist, anti-austerity party will come to power has heightened risks for some banks.