Greek eurozone exit would have 'modest' direct impact

Greek exit from the single currency area would have only a "modest" direct impact on eurozone banks - Fitch Ratings has claimed in a new report. The ratings agency maintained that Greek and Cypriot banks would be "severely exposed", but the cross-border direct effect on neighbouring countries would be "limited" – if European leaders reacted quickly with a positive support agenda.

Addressing the bigger picture though, Fitch admitted that the "indirect impact of a Greek redenomination on banks throughout the eurozone could be severe, most notably in Spain and Italy". The report warned policy-makers to prepare a "robust response" to prevent potential contagion from a Greek exit.

Fitch claimed that, following a Greek withdrawal from the single currency, it would "expect a strong public statement of commitment by the European Central Bank and eurozone policy-makers to provide support, if required", adding: "Furthermore, this statement would need to be backed up by specific policy actions. The willingness to extend a €100bn credit line to Spain to support its banks is a clear sign of policy-makers' willingness to do what is necessary.

"While a Greek exit is not Fitch's base-case scenario, 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. Redenomination would result in escalating impaired loans for these institutions, while deposit runs prior to enforced freezes and loss of ECB liquidity would hit funding."

Outlining the problems facing Cyprus – another country expected to ask for a eurozone bail-out – and other troubled states, the ratings agency said: "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. 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 European Union 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. 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."