STOCK MARKET WATCH -- Tuesday, 26 June 2012

[Demeter]

10. Big Contagion Risks if Greece Leaves Euro Zone - Fitch

http://online.wsj.com/article/BT-CO-20120613-703953.html

There is currently "enormous uncertainty" about Greece's political direction, and the contagion risks would be significant if the country chooses to leave the euro zone, a senior official at Fitch Ratings said Wednesday, JUNE 13. If Greece were to exit the euro, Fitch is quite likely to downgrade its ratings for most of the euro-zone peripheral countries, Fitch Managing Director for Sovereigns Ed Parker said at a conference. Political risks are on the rise in Europe, said Mr. Parker, adding that a prolonged recession in the region might give rise to "reform fatigue."

A new round of Longer Term Refinancing Operation loans to banks from the European Central Bank seems inevitable if Greece leaves the euro, and is likely even if the country keeps the common currency, Fitch Managing Director for Financial Institutions James Longsdon said at the conference. The ECB's earlier LTRO rounds have eased, but not eliminated, funding concerns in Europe, he added.

In the Nordic region, the banks have generally benefited from solid capitalization, but some of them still face some potential problems, said Jens Hallen, Fitch director for financial institutions. Some of the issues facing Nordic banks include slow economic growth in Denmark, Swedish lenders' reliance on potentially unstable international investors for funding, and the possibility of a future housing bubble in Norway, he added. If the financial turmoil in the euro zone should intensify, for instance through a Greek exit, Nordic banks are likely to see little direct impact as their exposures to the region's periphery are limited, Mr. Hallen told Dow Jones Newswires in an interview at the conference. However, the banks could suffer indirect effects in the longer term, for example if Nordic companies' exports to the euro zone get hit, he said.

Swedish banks will need to manage their liquidity tightly in order to limit the risks of their foreign funding reliance, said Mr. Hallen. They have limited scope for replacing the market funding with deposits as Swedes tend to save relatively little in bank accounts, he noted. There is a "medium" risk that the Swedish banks' foreign funding dries up if the European financial crisis gets worse, said Mr. Hallen. However, an intensifying euro-zone crisis could also have the opposite effect as it could potentially lead international investors to move funds from the continent to Swedish banks, he added.