Fitch Ratings has upgraded Greece’s Long-Term Foreign-Currency Issuer Default Ratings (IDR) to ‘B-‘ from ‘CCC’, with a ‘positive’ outlook.
The full list of rating actions is as follows:
- Long-Term Foreign-Currency IDR upgraded to ‘B-‘ from ‘CCC’; Outlook Positive
- Long-Term Local-Currency IDR upgraded to ‘B-‘ from ‘CCC’; Outlook Positive
- Short-Term Foreign-Currency IDR upgraded to ‘B’ from ‘C’
- Short-Term Local-Currency IDR upgraded to ‘B’ from ‘C’
- Country Ceiling revised to ‘B’ from ‘B-‘
- Issue ratings on long-term senior-unsecured bonds upgraded to ‘B-‘ from ‘CCC’
- Issue ratings on short-term senior-unsecured bonds upgraded to ‘B’ from ‘C’
The full rating report follows below:
Fitch Ratings has upgraded Greece’s Long-Term Foreign-Currency Issuer Default Ratings (IDR) to ‘B-‘ from ‘CCC’. The Outlooks are Positive.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
The upgrade of Greece’s IDRs reflects the following key rating drivers and their relative weights:
MEDIUM
Fitch believes that general government debt sustainability will steadily improve, underpinned by on-going compliance with the terms of the European Stability Mechanism (ESM) programme, and reduced political risk, sustained GDP growth and additional fiscal measures legislated to take effect through 2020. The successful completion of the second review of Greece’s ESM programme reduces risks that the economic recovery will be undermined by a hit to confidence or by the government building up arrears with the private sector.
The Positive Outlook reflects Fitch’s expectation that the third review of the adjustment programme will be concluded without creating instability and that the Eurogroup will grant substantial debt relief to Greece in 2018. In its statement on 15 June 2017, the Eurogroup confirmed its commitment to implementing a set of debt relief measures aimed at keeping gross financing needs below 15% of GDP in the medium term and below 20% of GDP thereafter. This should support market confidence, which will help support post-programme market access. In Fitch’s view, the political backdrop has become more stable and the risk of any future government reversing policy measures adopted under the ESM programme is limited.
The debt relief measures include restarting disbursement of profits on Greek bonds held by the ECB, partial early ESM refinancing of relatively expensive IMF loans, and further European Financial Stability Facility relief (interest rate caps, coupon deferrals and maturity extensions).
Fitch notes that the Eurogroup has outlined plans to link debt relief measures to actual growth outcomes over the post-programme period. In our view, this would be an important development as it increases confidence that the general government debt will remain on a sustainable path in the face of adverse growth shocks. European partners appear to be shifting the focus of Greece’s future conditionality from strict fiscal targets towards restoring medium-term GDP growth.
Public finances are improving. In 2016 Greece recorded a primary surplus of 3.9% of GDP, well above the ESM programme target of 0.5%, owing to higher than budgeted revenues and expenditure restraint. We expect the government to record an average primary surplus of 2.8% of GDP over 2017-19. Assuming nominal GDP growth of 3.4%, general government gross debt is forecast to fall to 169.5% of GDP in 2019. The government has already legislated fiscal measures that are projected to yield 3% of GDP through 2018, of which just above two-thirds will come from pension and income tax reform. Full implementation may face political constraints, but there is a contingent fiscal mechanism to retrospectively trigger further measures if a fiscal target is missed.
The economy is gradually recovering. Recent high frequency indicators point to a faster pace of economic activity, following a weak 1Q performance due to the impact of programme delays on confidence and payments to the private sector. The European Commission economic sentiment indicators reached a two-year high in July on the back of rising consumer and business confidence.
The completion of the second review and the subsequent disbursement of EUR8.5 billion by the ESM have supported confidence and injected liquidity in the economy through clearance of arrears with the private sector. Fitch forecasts real GDP growth of 1.6% and 2.1% in 2017 and 2018. Pent-up investment demand, a declining unemployment rate and continued clearance of government arrears are set to support domestic demand. Growth recovery in the eurozone should support export performance.
Greece’s IDR also reflect the following key rating drivers:
The ratings are underpinned by high income per capita levels, which far exceed ‘B’ and ‘BB’ medians. Greece’s financial crisis and recession exposed shortcomings in government effectiveness and put acute pressures on political and social stability. However, governance is still significantly stronger than in most sub-investment-grade peers.
Over two-thirds of the total economy’s external debt is held by official creditors and the Eurosystem, helping to keep external debt servicing at a manageable 12% of GDP. The average maturity of debt is favourable at 18 years, among the longest across all Fitch-rated sovereigns. The maturity profile is also benign. Central government debt repayments are set to peak in 2019. We expect repayments per year to remain moderate through to 2030.
The Greek sovereign returned to the capital markets on 25 July after three years. Greece placed a new benchmark EUR3 billion five-year bond with a yield of 4.625%. The issuance has allowed the sovereign to smooth the debt maturity profile: of EUR3 billion, around half was swapped in exchange for bonds due to mature in 2019. We expect the government to continue to issue market debt and use the proceeds to smooth further the maturity profile and build a sizeable deposit buffer before the end of the ESM programme.
In Fitch’s view, political risks have partly reduced. The Tsipras government has legislated a set of politically difficult measures and its parliamentary majority has held up. We think near-term snap elections are unlikely. Based on recent polls, Syriza trails by 15-20pp the centre-right New Democracy party, which has less ideological opposition to a number of the programme measures but has been arguing for its renegotiation in particular on the fiscal targets. Early elections would provide a source of uncertainty that would likely undermine the recent economic recovery.
Confidence in the banking sector remains fragile although it is improving. On 2 August the ECB lowered the Emergency Liquidity Assistance (ELA) ceiling for Greek banks to EUR38.9 billion from its peak of EUR90 billion in July 2015, reflecting positive development in liquidity conditions. Moreover, following completion of the second review, the Greek government has announced a further relaxation in capital controls effective from 1 September 2017.
The customer deposit base is prone to volatility, despite the positive developments. After falling by 27% between September 2014 and July 2015, private sector deposits have barely recovered. Since the relaxation of capital controls in July 2016, the inflow of deposits has been subdued. Several delays to the programme review may have put additional pressure on investor confidence, although capital controls have limited deterioration in banks’ liquidity position.
A key challenge for the banking sector is tackling non-performing exposures (NPEs), which remain stubbornly high at 45% of gross loans. Improvements have been made to the legal and institutional framework for resolving loans and banks have stepped up their restructuring efforts but with limited effect on the stock of NPEs so far. The reform of the out-of-court workout (OCW) is seen by the authorities and the European partners as a key element of the NPL resolution strategy. The basic infrastructure to have the OCW functioning is now in place. The expectation is that there will be an increase in voluntary negotiations between creditors and debtors to reach agreements on debt restructuring solutions.
SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
Fitch’s proprietary SRM assigns Greece a score equivalent to a rating of ‘BB’ on the Long-Term Foreign Currency IDR scale.
In accordance with its rating criteria, Fitch’s sovereign rating committee decided to adjust the rating indicated by the SRM by more than the usual maximum range of +/- 3 notches because of Greece’s experience of financial crisis.
Consequently, the overall adjustment of four notches reflects the following adjustments:-
-Public Finances: -1 notch, to reflect public debt at close to 180% of GDP; the SRM does not capture “non-linear” vulnerabilities at such a high level;
– External finances: -2 notches, to reflect: a) Greece’s high net external debt which is not captured in the SRM, and lack of market access which reduces financing flexibility, and b) the +2 notch SRM enhancement for “reserve currency flexibility” has been adjusted to +1 notch given Greece’s financial crisis experience;
-Structural Features: -1 notch, to reflect political risks to the programme, and a weak banking sector reliant on official sector funding and with capital controls still largely in place.
Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign Currency IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable or not fully reflected in the SRM.
RATING SENSITIVITIES
Future developments that could, individually or collectively, result in positive rating action include:
-Evidence that the recent economic recovery is sustained and a track record of achieving primary surpluses.
-Material debt relief from the official sector.
-Further track record of successful implementation of the ESM programme, underpinned by an orderly working relationship between Greece and its official sector creditors and a fairly stable political environment.
The Outlook is Positive. Consequently, Fitch does not currently anticipate developments with a high likelihood of leading to a downgrade. However, future developments that could, individually or collectively, result in negative rating action include:
-Deviation from fiscal targets and a reversal of the policies legislated under the ESM programme
-A breakdown in relations with creditors, reducing the prospect of debt relief measures from the Eurogroup.
KEY ASSUMPTIONS
-Our base case assumes the third programme review is completed without creating political and economic instability.
-Any debt relief given to Greece under the ESM programme will apply to official sector debt only, and would not therefore constitute an event or default under the agency’s criteria.
The full list of rating actions is as follows:
- Long-Term Foreign-Currency IDR upgraded to ‘B-‘ from ‘CCC’; Outlook Positive
- Long-Term Local-Currency IDR upgraded to ‘B-‘ from ‘CCC’; Outlook Positive
- Short-Term Foreign-Currency IDR upgraded to ‘B’ from ‘C’
- Short-Term Local-Currency IDR upgraded to ‘B’ from ‘C’
- Country Ceiling revised to ‘B’ from ‘B-‘
- Issue ratings on long-term senior-unsecured bonds upgraded to ‘B-‘ from ‘CCC’
- Issue ratings on short-term senior-unsecured bonds upgraded to ‘B’ from ‘C’
