Fitch: Impact of hypothetical Grexit on eurozone banks

In a new report, Fitch Ratings says that a hypothetical Greek exit would have limited direct, cross-border impact on neighbouring countries. While Greek and Cypriot banks would be severely exposed, the direct impact on most of the other eurozone banks would be modest. Of these, banks with subsidiaries or branches in Greece would be most affected, and the impact they faced would depend on the extent to which they are funding Greek assets cross-border.

However, Fitch believes the indirect impact of a Greek redenomination on banks throughout the eurozone could be severe, most notably in programme countries as well as 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 ECB and eurozone policymakers to provide support, if required. Furthermore, this statement would need to be backed up by specific policy actions. The willingness to extend a EUR100bn credit line to Spain to support its banks is a clear sign of policymakers’ willingness to do what is necessary.

While a Greek exit is not Fitch’s base case scenario, a second Greek election on 17 June and the increasing possibility that a populist, anti-austerity party will come to power has heightened risks for some banks. Fitch’s Issuer Default Ratings (IDRs) on the five Greek banks it rates are now all at ‘CCC’. The banks’ Viability Ratings (VRs), which strip out extraordinary support potential, are all at ‘f’. Redenomination of the currency and conversion of deposit and other liabilities would be considered to be a distressed debt exchange (DDE) for Greek banks under Fitch’s criteria, given that this would be a markedly devalued currency. Redenomination would also result in escalating impaired loans for these institutions, while deposit runs prior to enforced freezes and loss of ECB liquidity would hit funding.

After Greek banks, Cypriot banks are most exposed to Greek redenomination risks given their direct exposure to Greek loans and to the Greek economy through their large branch networks in the country. The IDRs of the three rated banks in Cyprus are ‘BB+’ and on Rating Watch Negative (RWN) while VRs are ‘b-‘/RWN at best.

Fitch believes the impact on banks’ IDRs in the rest of the eurozone 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. The EUR100bn credit line extended to Spain to support its banks should help to reduce some of the contagion there.

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.

Further information is in the report, «Greek Exit Scenario for Eurozone Banks», available at

[Fitch Ratings text carried by Reuters]

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