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The upgrade of Greece’s sovereign ratings by one notch to ‘B-‘.
Fitch Ratings has upgraded Greece’s Long-term foreign and local currency IDRs to ‘B-‘ from ‘CCC’. The Short-term foreign currency IDR has also been upgraded to ‘B’ from ‘C’ and the Country Ceiling upgraded to ‘B’ from ‘B-‘. The Outlook on the Long-term IDRs is Stable.
The ratings agency argues that the the Greek economy is rebalancing saying that a “clear progress has been made towards eliminating twin fiscal and current account deficits and ‘internal devaluation’ has at last begun to take hold”.
In a report outlining Greece’s credit rating Fitch cited key assumptions from their research for the change:
– Political and social stability are maintained and the current administration remains in place.
– Continued broad adherence to the EU-IMF EAP. The sustainability of Greece’s public finances and its continued membership of the eurozone depend upon the implementation of structural and fiscal reforms and their effectiveness in laying the foundations for a sustained economic recovery. Outright rejection of the EAP, or material slippage against targets, would trigger a downgrade.
– Fitch assumes that the EUR50bn allocated to recapitalisation of Greek banks is sufficient and that the financial sector makes no further material demands on the sovereign balance sheet.
– Public debt outcomes are sensitive to assumptions about growth, the primary balance and interest rates.
– Greece remains a member of the eurozone and does not seek to impose capital controls in the face of renewed strains on sovereign creditworthiness. In the event of a Greek exit from EMU, Fitch would treat the forcible redenomination of sovereign and private sector debt as a default event in line with its Distressed Debt Exchange rating criteria.
– The eurozone remains intact and that there is no materialisation of severe tail risks to global financial stability and investor confidence.
The Economic Adjustment Programme (EAP) is on track amid a semblance of political and social stability. The current administration has displayed much greater ownership of the EU-IMF funded EAP than its predecessors, committing to further upfront fiscal consolidation and a renewed push on structural reforms. Still, tangible economic recovery remains elusive, while resistance to reform is high, underlining the continuing risks to implementation.
Greek primary fiscal adjustment of over 9% of GDP in 2009-12 (excluding one-off support to the financial sector), and around 16% in cyclically adjusted terms, ranks as the most ambitious instance of fiscal consolidation among advanced economies in recent times. The current account deficit has also shrunk from 10% of GDP in 2011 to 3% in 2012. The revised EU-IMF programme gives Greece two additional years (2015-16) to attain a primary surplus of 4.5% of GDP. This relaxation is reflected in Fitch’s expectation of a milder economic contraction of around 4.3% in 2013 (-6.4% in 2012) and a weak recovery in 2014.
Structural reforms are progressing according to Fitch’s analysis. The financial system is reportedly stabilising: EUR16bn-EUR17bn of time deposits have returned to the system since mid-2012 and bank recapitalisation is well advanced. Meanwhile, a small, but significant milestone was passed earlier this month with the completion of the first major privatisation since the EAP began. Considerable progress has also been made with labour market reforms and 80% of the earlier loss of competitiveness has been clawed back. However, product market reform remains a major challenge: progress in this area will be important to support a sustainable recovery and for the success of the EAP.
Extensive private and public sovereign debt restructuring has put programme funding on a more secure footing and should moderate the rise in the peak public debt/GDP ratio to around 180% in 2013-14. Notwithstanding this still extremely high headline public debt ratio, the significantly reduced interest cost and maturity extension provided by the debt restructuring and EAP financing means that sovereign debt service now appears more secure than the size of the debt stock would otherwise imply. Even so, public debt sustainability is still far from assured and will be dependent on economic recovery and a sustained primary fiscal surplus.
