S&P Report Says Financial Contagion Risk Of A Grexit Should Be Containable

The financial contagion risk of a potential Grexit should be containable, but it could trigger longer-term consequences that are difficult to foresee, says Standard & Poor's Ratings Services in a new report: "The Credit Impact Of A Grexit."

Standard & Poor's now believes the probability that Greece will exit the eurozone has increased to about 50%, following the Greek government's decision over the weekend to reject official creditors' loan proposals and instead schedule a national referendum on whether to accept the terms of the proposals.

The report examines the credit impact on the European economy, banks,insurers, corporates, and structured finance of Greece leaving the European Economic and Monetary Union:

EUROZONE ECONOMIES.
We believe the economic impact of a Grexit on the rest of the eurozone would be somewhat contained. Nonetheless, it could potentially initially hurt the capital markets, causing an initial spike in yields, especially for those economies on the periphery perceived by the markets as fiscally more vulnerable.

EUROZONE SOVEREIGN CREDITWORTHINESS.
A Grexit may not immediately have a negative rating impact for other eurozone sovereigns because of the more robust financial support architecture in place today in the eurozone, as well as the marked reduction of financial linkages between Greece and the rest of the eurozone (see also "Greece In Crisis: Frequently Asked Questions," June 30, 2015).

GREEK AND FOREIGN BANKS AND INSURERS.
A Grexit would worsen an already desperate situation for the Greek banks (see: "Ratings On Four Greek Banks Lowered To 'SD' Following Restrictions Imposed On Deposits," June 30). However, the impact on foreign banks and insurers would be limited and would unlikely lead to rating actions, because these institutions have already limited their direct exposures against Greek entities (see "This Time, Foreign Banks Have Less To Fear About A "Grexit," March 10, 2015.)

GREEK NONFINANCIAL CORPORATIONS.
Although Greece-based corporates have reduced their exposure to Greece in recent years, the now substantially greater probability of a Grexit increases the credit risks of companies we rate. On July 1, 2015, we downgraded Greek companies with country risk exposure to the Greek economy (see "Greek Corporations Ellaktor, Public Power Corp., And OTE Long-Term Ratings Lowered Following Similar Action On Sovereign").

GREEK STRUCTURED FINANCE TRANSACTIONS.
We would expect a Grexit to have a severe impact on the creditworthiness of the 18 tranches that we currently rate on seven securitizations backed by Greek collateral. Nevertheless, these securitizations amount to only 0.3% of our outstanding European structured finance ratings universe by number of ratings.

"All of the above leads us to believe that the financial contagion risk of a Grexit should be containable," said Standard & Poor's credit analyst Lapo Guadagnuolo. "Nonetheless, should Greece exit the single currency, the permanence of the monetary union will have been proved false, and this could throw into question assumptions underpinning more than two decades of political and economic policy. This could trigger longer-term consequences that are difficult to foresee," said Mr. Guadagnuolo.

"We therefore believe a Grexit would be such a unique event that we cannot discount a scenario that could bring severe contagion and long-term damage to political cohesiveness, said Mr. Guadagnuolo. "This could lead to renewed
financial fragmentation in the region, with negative implications for borrowers' creditworthiness in and outside Europe."

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