Fitch sees Greek ruin risk

An analyst has warned of a “high” risk of a second Greek bankruptcy.

The southern European country, which is part of the Eurozone and the European Union (EU) asked the EU, the International Monetary Fund (IMF) and the European Central Bank (ECB) for financial support for the first time last year to avoid state bankruptcy. EU leaders are currently discussing whether to support the ailing nation with more money to help it get back on track – while the number of economists and politicians refusing to rule out a controlled insolvency of Greece is increasing.

Now Douglas Renwick of influential US credit rating agency Fitch said he considered the possibility of another Greek bankruptcy as “high”. Speaking to the Salzburger Nachrichten newspaper, the analyst said today (Fri) he expected private investors to get involved in the attempts to rescue the country from ruin. He said it had to be seen whether such an engagement would have a positive impact. German Chancellor Angela Merkel and other EU member state leaders have called on banks to do their bid in helping Greece.

“Now it is about whether Greece will go bust a second time or recover after a possible engagement of the private sector. We consider the possibility of insolvency as high, but generally assume that the measures will work out. We also think that Greece will remain within the Eurozone in the case of a bankruptcy,” Renwick told the paper.

A growing number of think tanks have claimed that the Euro could only be saved if struggling countries like Greece abandoned it. Some economic researchers like Hans-Werner Sinn have suggested splitting the Eurozone – which currently consists of 17 countries – into a northern and a southern branch. According to Sinn, economically challenged countries such as Greece and Portugal would have better chances to recover if separated from prospering nations situated in Central and Northern Europe.

Economic historian Joachim Voth caused a stir by arguing it would be better if the stronger states exited the Eurozone as they may cope with negative impacts on their economies such a move would bring better than already struggling countries. “Kicking countries which do not make it out of the Eurozone would end in disaster because the banks would implode,” Voth told the Salzburger Nachrichten earlier this week.

Renwick explained today his rating agency worried more about Italy than Belgium “although the country still does not have a government one and a half years after the general election and despite its high state debt”. Renwick added Fitch saw no major payment issues coming up for Cyprus due to potential support by Russia.

Speaking about Greece, he explained that the country’s economy was inflexible. “This makes painful structural reforms necessary,” Renwick said, adding that Latvia recovered because of being an “open and flexible economy”.

The Fitch analyst warned about underestimating the effect smaller countries’ difficulties could have on the condition of the Eurozone. “Greece, Ireland and Portugal are small. But what happens there can influence the estimation of Italy’s condition massively because of the worries about the Euro as a whole,” he told the Salzburger Nachrichten.

Asked whether the current debt crisis was unique, Renwick pointed out that “such cycles have always happened. This time around, the situation may be a bit more extreme because it went up for quite some time. Now the economic downturn is stronger.”

Renwick appealed to politicians to keep actively trying to solve the manifold problems. He said the negotiated mechanisms must work on the short run and in the long term – and warned that several setbacks may lie ahead.

Renwick’s appeal to decision-makers comes shortly after former European Commission (EC) Vice President Günter Verheugen accused Merkel of having become “implausible” by taking too many turns in trying to solve the crisis. “Now she is waving the European flag again, but no one believes her claims of having a clear concept,” the German politician Social Democratic Party (SPD) official said.

Verheugen is not the first opinion leader to harshly criticise Merkel for her actions. Former Chancellor Helmut Kohl was quoted as saying that she “damages my Europe”.

Former EC President Romano Prodi told profil in July: “I don’t see leadership skills anywhere in the EU. Large countries are concerned with their own interests. Germany and France aren’t the engines of the European integration anymore. Who is taking responsibility for European interests? No one does.”

Prodi claimed Europe “would be lost without the Euro” while Austrian National Bank (OeNB) Governor Ewald Nowotny attacked the world’s leading agencies – Fitch, Standard & Poor’s (S&P) and Moody’s – for  being “much stricter” in their estimation of the condition of countries in Europe in contrast to “similar cases in South America”.

Austrian Social Democratic (SPÖ) Chancellor Werner Faymann, Siemens manager Brigitte Ederer and others have spoken out in favour of establishing a European rating agency to create more of a balance and challenge the claims of the big three – which are all based in the United States. Andreas Treichl hit back by calling the idea “childish”. Treichl heads Erste Bank Group AG (Erste Bank), one of the biggest banks of Central and Eastern Europe (CEE). The financial institute has its headquarters in Vienna. The under-fire credit rating agencies have argued their decision-making was fully transparent.

Nowotny said last week he was “deeply concerned” about delays in setting up the European Financial Stability Facility (EFSF), a permanent vehicle which should bolster economically struggling EU member countries. “Our time is limited,” he told radio station Ö1.

The OeNB boss claimed some political leaders were unaware of the risk of negative effects on their countries in the case of further delays. A few days after he issued his warning, Austrian People’s Party (ÖVP) Vice Chancellor Michael Spindelegger refused to rule out that Greece may go bust. Spindelegger said a bankruptcy of the country was “one of several possible scenarios”. The Austrian foreign minister’s appeal to everyone involved in trying to solve the crisis to keep analysing the situation precisely and coolly.

Heinz-Christian Strache, the head of Austria’s leading opposition faction, said reintroducing the Schilling in Austria should be one possible future option – although economists have warned that the domestic economy would shrink immediately if the alpine country exited the Eurozone. The Freedom Party (FPÖ) leader called on the EU to throw Greece out of the Eurozone and asked the Austrian SPÖ-ÖVP government to stop pouring more money into the ailing country.

Alliance for the Future of Austria (BZÖ) chairman Josef Bucher also favoured stopping any further payments. His party was widely criticised for using Bible verses including “Father forgive them, for they know not what they do” in a new series of posters showing Bucher reading the Financial Times paper in a café.