Fitch Downgrades Greece

The Telegraph reports:

Fitch Ratings downgraded Greece's sovereign rating to CCC from B- and sounded a wider alert for the rest of the currency bloc. It said it would put the entire zone on downgrade watch if after June 17's poll, "Fitch assesses that the risk of a Greek exit from European Monetary Union is probable in the near term."

The agency said it had cut Greece's rating to reflect "the heightened risk that Greece may not be able to sustain its membership of EMU"

It said "the strong showing of 'anti-austerity' parties in the May 6 elections and subsequent failure to form a government underscores the lack of public and political support for the EU-IMF €173bn programme".

Should the voters once again reject austerity and structural reform, Fitch said "an exit of Greece from EMU would be probable". That would be expected to trigger "a widespread default on private sector as well as sovereign euro-denominated obligations".

The agency's warning came as the front runner to become Greece's next leader, Alexis Tsipras, vowed that he would never yield to European demands to impose "barbaric" austerity.

And there is this:

Economists warned that the Greek financial system could crumble within weeks or days unless the European Central Bank steps up support.

President Karolos Papoulias told party leaders that banks had lost €700m in withdrawals on Monday alone as citizens rush to pre-empt capital controls and a much-feared return to the Drachma.

He cited central bank warnings that "great fear" might soon escalate to panic. The leaked details lend credence to claims that capital flight by both savers and firms have reached €4bn a week since the triumph of anti-bailout parties on May 6.

Steen Jakobsen from Saxo Bank said outflows are becoming unstoppable, not helped by open talk in EU circles of `technical’ plans for Greek withdrawal.

"This has a self-fulfilling prophecy built into it and I don’t think we can get to June. The fuse is burning and the only two options now are a controlled explosion where Germany steps in to ensure an orderly exit, or an uncontrolled explosion," he said.

* * *

Greek banks have lost 30pc of their deposits since late 2009. The total fell to €171bn in March. "The surprise is that there is still so much left. I can’t believe it will stay much longer," said Simon Ward from Henderson Global Investors.

The ECB is holding the line with an estimated €100bn of Emergency Liquidity Assistance (ELA) for lenders, channeled through Greece’s central bank. Supplicants must pawn their loan book in exchange. "The risk is that banks will run out of collateral since these are low quality assets with haircuts of 50pc or more. The ECB could relax the rules but they would have to take an active decision to do so," said Mr Ward.

JP Morgan said Greek banks have already exhausted their collateral. A refusal by the ECB to ease rules would amount to expulsion, forcing Greece "to issue its own money."

The ECB said it had stopped routine operations with certain Greek banks with depleted capital buffers, but underscored that they are still able to access the ELA scheme.

 And this:

The Spanish Treasury had to pay around 5pc to attract buyers of three- and four-year bonds. The longer-dated bonds sold with a yield of 5.106pc, way above the 3.374pc the last time it was auctioned.

"This ... fits the pattern of recent sales, with the Spanish treasury successfully getting its supply away but at ever-higher yields," said Richard McGuire, rate strategist at Rabobank in London.

"This unfavourable trend looks set to remain firmly in place ... Ultimately, this ratcheting up of yields will likely require some form of outside intervention," McGuire said.

Spanish Prime Minister Mariano Rajoy said yesterday his government, struggling to reduce its budget deficit, could soon find it difficult to fund itself affordably on the bond market unless the pressure eases.

* * *

Official data confirmed the Spanish economy shrank by 0.3pc in the first quarter, putting it back into recession and facing a prolonged downturn as the government cuts spending in an attempt to wrestle down its budget deficit.

Unemployment is already running close to 25pc, rising to around 50pc among the young.

Even if it puts its house in order, Madrid faces the threat of contagion from Greece if it elects an anti-bailout government next month, a move which could hasten a hard default by Greece and its exit from the euro zone.

"It's not Greece leaving the euro that is the major issue," said John Bearman, chief investment officer at Thomas Miller Investment, which manages roughly £3bn of assets. "It's the domino effect."