DBRS up­grades Greece on lower risk fears

Financial Mirror (Cyprus) - - FRONT PAGE -

DBRS Rat­ings has up­graded the Hel­lenic Repub­lic’s longterm for­eign and lo­cal cur­rency is­suer rat­ings to B from CCC (high), with the short-term for­eign and lo­cal cur­rency is­suer rat­ings up­graded to R-4 from R-5. The trend on the long-term for­eign and lo­cal cur­rency rat­ings has been re­vised to Sta­ble from Neg­a­tive, and for the short-term for­eign and lo­cal cur­rency rat­ings it re­mains Sta­ble.

The up­grade re­flects DBRS’ view that the risk of Greece leav­ing the euro area and of fur­ther rounds of re­struc­tur­ings of pri­vately-held debt has de­clined. In ad­di­tion, progress in meet­ing fis­cal tar­gets un­der the eco­nomic and fi­nan­cial ad­just­ment pro­gramme points to the likely con­tin­u­a­tion of sup­port from the euro area cred­i­tors.

The slow­down in the pace of eco­nomic con­trac­tion and the ex­pec­ta­tion that GDP will start to grow again this year will help sup­port debt re­duc­tion ef­forts, DBRS said, adding that banks’ re­duced re­liance on ECB liq­uid­ity and the im­prove­ment in the bank­ing sys­tem’s cap­i­tal buf­fers, as well as the sta­bil­i­sa­tion of the de­posit base, also point to an im­prove­ment in fi­nan­cial con­di­tions, al­beit from very low lev­els.

More­over, con­tin­gent on Greece’s progress on the fis­cal and struc­tural re­forms front over the next 12 months, a re­struc­tur­ing of the of­fi­cially-held loans in the run-up to the next gen­eral elec­tion could also sup­port growth, debt sus­tain­abil­ity, and put up­ward pres­sure on the rat­ing.

The Sta­ble trend re­flects DBRS’ view that fi­nan­cial sup­port from Eu­ro­zone part­ners and signs of macroe­co­nomic sta­bil­i­sa­tion are bal­anced against sev­eral fac­tors that con­tinue to ma­te­ri­ally con­strain the rat­ings. These in­clude: (1) Greece’s el­e­vated level of pub­lic sec­tor debt; (2) the need to im­ple­ment additional size­able fis­cal con­sol­i­da­tion to keep the debt on a down­ward tra­jec­tory; (3) the weak per­for­mance of ex­ports of goods de­spite the sharp drop in unit labour costs; (4) the high lev­els of non-per­form­ing loans; and (5) the coun­try’s ex­tremely high un­em­ploy­ment rate, which com­bined with aus­ter­ity fa­tigue could un­der­mine sup­port for the ad­just­ment pro­gramme. Fac­tors which could put the rat­ing un­der down­ward pres­sure in­clude the re­course to Pri­vate Sec­tor In­volve­ment (PSI) as a means to re­duce Greece’s fund­ing needs over 2015-16 or the loss of the pri­mary sur­plus due to a slug­gish re­cov­ery or poor pol­icy im­ple­men­ta­tion as a re­sult of the wan­ing of po­lit­i­cal sup­port for the pro­gramme.

Con­versely, fac­tors which could put up­ward pres­sure on the rat­ing over the next few months in­clude the pro­vi­sion of additional sup­port by the euro area cred­i­tors and con­tin­ued ac­cess to the sov­er­eign bond mar­kets at af­ford­able yields which would al­low Greece to close the fi­nanc­ing gap in 2015-16 with­out in­volv­ing any form of PSI.

As a re­sult of the two as­sis­tance pro­grammes from which Greece ben­e­fited since May 2010, a large share (81.2% at end 2013) of pub­lic debt is now in the hands of the of­fi­cial sec­tor. With such a high share of its stock of debt, Greece ben­e­fits from a favourable debt ma­tu­rity (15.8 years on aver­age) and be­nign fi­nanc­ing terms (2.4% ef­fec­tive in­ter­est rate in 2013).

In ad­di­tion, the Novem­ber 2012 de­ci­sion by the Eurogroup to grant Greece a ma­tu­rity ex­ten­sion on its EFSF and Greek Loan Fa­cil­ity (GLF) bor­row­ing and to re­duce by 100 ba­sis points the in­ter­est rates paid on the GLF loans has con­trib­uted to a low­er­ing of the debt ser­vic­ing bur­den through the mid2020s. In ad­di­tion, the Greek bank­ing sec­tor has ben­e­fited from the EUR 49.7bln back­stop fa­cil­ity man­aged by the Hel­lenic Fi­nan­cial Sta­bil­ity Fund (HFSF). Fol­low­ing the pub­li­ca­tion of the re­sults of the EU-wide bank­ing sec­tor stress tests later in the year, the govern­ment will be in a po­si­tion to de­ter­mine how much, if any of the funds re­main­ing in the HFSF could be mo­bilised to­wards help­ing Greece close its fi­nanc­ing gap.

Greece has made sig­nif­i­cant progress in re­bal­anc­ing its econ­omy as re­flected in the de­liv­ery of the first cur­rent ac­count sur­plus (at 0.7% of GDP) in over 60 years and the first pri­mary bal­ance in 11 years. More­over, the pri­mary bal­ance reached a sur­plus, al­beit a mod­est one at 0.8% of GDP.

Greece has also adopted a num­ber of re­forms meant to lift some of the rigidi­ties that have long char­ac­terised the econ­omy and which have likely de­pressed po­ten­tial growth. Go­ing for­ward, the govern­ment has sig­nalled its com­mit­ment to im­ple­ment­ing a fur­ther large num­ber of the prod­uct mar­ket re­forms iden­ti­fied by a re­cent OECD study in the ar­eas of food pro­cess­ing, tourism, build­ing ma­te­ri­als, and re­tail. These con­crete mea­sures aim to lib­er­alise the trans­port and rental mar­kets, open up closed pro­fes­sions, and re­duce so­cial se­cu­rity con­tri­bu­tion rates.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.