NICOSIA - Fitch expects the eurozone to ‘muddle through’ the crisis, but warns Cyprus would be particularly hit should Greece be forced to exit the common currency.
In a new report yesterday, the ratings agency explored five alternative scenarios – from a Greek euro exit to a full break up.
“The risk of alternative outcomes, although small, is growing and cannot be discounted until a broad-based economic recovery is underway,” it said.
The likelihood of the demise of the euro remains very low. In the event of a Greek exit, the most likely of the five scenarios, all eurozone sovereign ratings would be placed on Rating Watch Negative with those already on a Negative Outlook at most risk of a downgrade, it said.
Greece would very likely have to re-denominate its debt and default again. Initially, Fitch would probably downgrade Cyprus, Ireland, Italy, Portugal and Spain owing to the 'exit precedent' of Greece and risk of contagion to banks, bond markets and capital flight; with Cyprus particularly vulnerable owing to its banking system's huge Greek loan book, it said.
The report only serves to dampen an already gloomy outlook with the Cyprus Stock Exchange plunging to an 11 year low and Finance Minister Vassos Sharly warning that the economic situation was ‘difficult”.
Although he would not elaborate, the minister indicated that further belt tightening could be round the corner as Cyprus struggles to rein in its fiscal deficit to 2.5% of GDP.