Fitch downgrades Greece, cites euro exit risk

AP News
Posted: May 17, 2012 4:08 PM
Fitch downgrades Greece, cites euro exit risk

Fitch ratings agency downgraded debt-crippled Greece deeper into junk territory on Thursday, warning of a "probable" Greek exit from the euro currency union if new national elections next month produce an anti-bailout government.

Fitch said it had cut Greece's rating by one notch, from B- to CCC, the lowest possible grade for a country that is not in default.

"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," the agency said in a statement.

In addition to its acute financial woes, Greece has entered a protracted political crisis after national elections on May 6 left no party with enough seats in Parliament to govern alone, and nine days of hectic talks failed to produce a coalition deal.

The country is headed for a new vote next month, most likely on June 17, and anti-austerity parties which clocked strong gains on May 6 are again expected to do well. That has raised deep concerns that, if the new government reneges on Greece's austerity pledges, the European Union and the International Monetary Fund could cut off the flow of bailout loans. Those rescue funds have shielded the country from bankruptcy for two years but had been agreed upon in exchange for deeply unpopular cuts in pensions and salaries, accompanied by steep tax hikes.

"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 program of fiscal austerity and structural reform, an exit of Greece from (the euro) would be probable," Fitch said.

"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," it added.

While Greece can't be pushed out under eurozone rules, it could well choose to jump. Stopping the rescue loans could inflict such misery that Athens might prefer to return to a grossly devalued form of its old drachma currency, whose constant depreciation would make the economy more attractive to foreign capital.

On May 6, an electorate fuming at more than two years of suffering amid a deep recession and rising unemployment heavily backed a bevy of parties to the left and right of center that pledged to scrap or thoroughly revise the country's key austerity commitments.

The two mainstream, pro-austerity parties that alternated in power for the past four decades _ and joined in a six-month coalition last year to secure new bailout and debt relief deals _ lost more than half their support. Conservative New Democracy won a Pyrrhic victory as it had too few legislators to govern without the backing of at least one anti-bailout party _ all which declined.

The second-placed Radical Left Coalition, or Syriza, insists that Athens must tear up its belt-tightening commitments, and maintains that the eurozone can't afford to lose Greece as that would trigger the entire currency union's collapse.

Opinion polls suggest that Syriza could win next month's election. It would automatically gain a 50-seat bonus in the 300-strong Parliament, rendering a coalition with other anti-austerity parties possible.

But a new survey Thursday indicated that the vote will be closely fought. The Marc poll for private Alpha TV gave New Democracy 26.1 percent, followed by Syriza at 23.7 percent. Although it predicted a new hung Parliament, the poll showed that the conservatives could form a governing majority with the depleted Socialists, who are also pro-austerity.

The survey gave a 2.7 percent margin of error.

Martin Koehring, an editor of the Economist Intelligence Unit, said it looks "almost inevitable" that Syriza will be the strongest party post-electorally.

"As Syriza strongly opposes austerity but wants to remain within the euro area, there will have to be difficult compromises if Syriza were to form a new government (which itself is far from certain)," he wrote in an email.

Koehring added that while around 70 percent of Greeks _ and most parties _ still want to keep the euro, sentiment runs firmly against fiscal austerity.

"Both a new Greek government ... and (bailout creditors) will have to acknowledge this dilemma and will have to find some middle ground (potentially involving a slight renegotiation of the austerity package) to avoid Greece being forced out of the euro," he wrote. "One thing is clear: a new Greek governing coalition will not have the legitimacy from the Greek electorate to continue with the current austerity plan."


Derek Gatopoulos contributed to this report.