Fitch: ECB Response Would Be Key if Greece Missed IMF Payment
LONDON, April 24 (Fitch) The response of the European Central Bank would be key
to the consequences of a missed payment by Greece to the IMF, Fitch Ratings
says. We still see a last-minute deal to secure fiscal funding from Greece's
creditors as the most likely outcome, but the risk of a missed payment cannot be
discounted.
ECB executive board member Benoit Coeure said this week, in response to a
question about the consequences of a possible missed IMF payment, that a
government default andthe impact on government bonds used as collateral "would
make it more difficult for banks to obtain liquidity." He also said the ECB
would "continue to extend liquidity to the Greek banks, as long as they are
solvent and they have adequatecollateral."
These and similar comments appear to imply that, although further restriction of
Emergency Liquidity Assistance (ELA) would be more likely following a missed IMF
payment, it is not certain. Press reports suggest that one consequencecould be
increased haircuts on the collateral.
ECB decision-making is a greater potential constraint than collateral
availability. At end-February, Greek banks had around EUR50bn of remaining ELA
collateral buffers, equivalent to around 35% of the system's domestic
private-sector deposits. This can be pledged to access additional funding or to
accommodate increased haircuts, implying that banks could cope with quite
substantial deposit withdrawals, assuming the ECB continues to increase its
ceiling on ELA as needed.
The ECB has considerable flexibility in how it interprets the rules under which
it may continue, limit, or discontinue further access to ELA. Cypriot banks were
not cut off from the ELA in 2013 despite concerns about banksolvency, although
the ECB did make ELA extension conditional on Cyprus entering an EU/IMF
programme. The ECB's response for Greece is likely to be tied to the progress of
discussions between the Greek government and its European partners.
Furtherrestricting ELA would be likely to damage depositor sentiment,
potentially increasing withdrawals. This may ultimately lead to restrictions on
the banking sector to reduce liquidity strains, including capital controls.
Capital controls could beintroduced in any case if deposit outflows were to
accelerate. As Cyprus has shown, they would not necessarily entail a eurozone
exit, and can eventually be reversed (Cyprus fully lifted capital controls on 6
April, two years after they wereintroduced). But capital controls present risks
to relations with foreign creditors, and would be a negative signal, potentially
further damaging consumer and investor confidence.
A missed payment to the IMF would be likely to increase pressure onGreek banks'
'CCC' ratings due to its potential impact on sentiment and therefore on funding
and liquidity, through protracted and heightened deposit withdrawals and/or
further ELA restrictions (imposition of capital controls affecting bank
creditors would be likely to result in bank downgrades to 'RD').
The ECB is already preventing Greek banks from providing additional funding to
the government, so any further tightening of ELA would primarily affect the
banks' rather than thesovereign's liquidity position. The latter is being
eroded by repayments to the IMF and the lack of external funding sources.
The timing of any fiscal disbursements from Greece's official creditors remains
highly uncertain two months after theyagreed to extend the country's existing
EFSF programme to end-June. Greece repaid EUR450m to the IMF in April while
running arrears to suppliers, and the government has told local authorities to
transfer reserves held in commercial banks to the Bank of Greece, citing
"extremely urgent and unforeseen needs." Greece faces further repayments to the
IMF of around EUR750m on 12 May and EUR1.5bn in June.
The pressure on Greek government funding contributed to our downgrade of
Greece's sovereignrating to 'CCC' from 'B' in March. A missed IMF repayment
would not itself constitute a sovereign rating default (we assume the EFSF would
not exercise its right to declare one of its loans to Greece due, triggering a
cross-default clause in manyprivately held bonds) but could lead to a further
sovereign downgrade. The increased risk of capital controls led us to lower our
Country Ceiling for Greece to 'B-' from 'BB' in March.