Moody’s rat­ing up­grade ‘pos­i­tive’ for struc­tured fi­nance trans­ac­tions

Financial Mirror (Cyprus) - - FRONT PAGE -

Moody’s In­vestors Ser­vice up­graded Greece’s govern­ment bond rat­ing by two notches to Caa1 from Caa3 last Fri­day on the ex­pec­ta­tion of an i mprove­ment in the coun­try’s eco­nomic out­look, the sig­nif­i­cant im­prove­ment in Greece’s fis­cal po­si­tion over the past year and the govern­ment’s re­duced in­ter­est bur­den and length­ened ma­tu­ri­ties of the debt trig­gered the pos­i­tive rat­ing ac­tion.

The rat­ing agency also raised Greece’s lo­cal and for­eign cur­rency bond and de­posit ceil­ings to Ba3 from B3 to re­flect the coun­try’s re­duced eco­nomic, le­gal and po­lit­i­cal risks.

Con­se­quently, the max­i­mum achiev­able rat­ing for Greek struc­tured fi­nance rated trans­ac­tions in­creased to Ba3(sf) from B3(sf).

Moody’s said it is as­sess­ing the im­pact of the govern­ment bond rat­ing ac­tion and the cor­re­spond­ing in­crease in the lo­cal-cur­rency coun­try ceil­ing on all out­stand­ing Greek struc­tured fi­nance rated trans­ac­tions. For this pur­pose, the rat­ing agency said it also con­sid­ers (i) the per­for­mance of the un­der­ly­ing as­set port­fo­lios in line with Moody’s col­lat­eral as­sump­tions and (ii) the coun­ter­party risks imbed­ded in the trans­ac­tions, in­clud­ing ser­vicers, ac­count banks and swap coun­ter­par­ties ex­po­sures, in ac­cor­dance with Moody’s method­olo­gies.

In it’s rat­ing up­grade, Moody’s said the the first fac­tor is the ex­pec­ta­tion that the gen­eral govern­ment debt to GDP ra­tio will start de­clin­ing in 2015, af­ter peak­ing this year to around 179% of GDP. The rat­ing agency said it ex­pects the govern­ment will reach its pri­mary sur­plus Troika tar­get of around 1.6% of GDP this year and that the head­line bud­get deficit will de­cline to 2.9% in 2014. Last year, the govern­ment reg­is­tered its first pri­mary sur­plus since 2002, one year be­fore it was sched­uled to do so, and was able to de­liver it in a de­cel­er­at­ing eco­nomic growth en­vi­ron­ment. The bud­get deficit shrank to 3.2% (un­der the Troika sup­port pro­gramme def­i­ni­tion) and 12.7% of GDP ac­cord­ing to Euro­stat’s def­i­ni­tion (which in­cludes bank re­cap­i­tal­i­sa­tion costs, among other items).

More­over, fu­ture bud­get tar­gets and debt re­duc­tion could fall to around 166% of GDP by 2018.

The sec­ond fac­tor sup­port­ing the up­grade is greater cer­tainty re­gard­ing the prospect of con­tin­ued im­prove­ments in the fis­cal and debt trends of­fered by Greece’s im­prov­ing eco­nomic en­vi­ron­ment, with the re­cov­ery show­ing signs of broad­en­ing from net ex­ports to do­mes­tic de­mand. In­vest­ment con­tin­ued to de­cline, but at a much lower rate (7.9%), sup­ported by the ab­sorp­tion of EU funds, es­pe­cially fol­low­ing the restart of large in­fra­struc­ture projects.

While Greece’s am­bi­tious struc­tural re­form agenda has had mixed re­sults to date, the Govern­ment has made good progress on labour mar­ket re­forms and in lib­er­al­is­ing some ar­eas of the prod­uct mar­kets. These re­forms have led to wage and price ad­just­ments, which far out­strip ad­just­ments else­where in the euro area pe­riph­ery, the rat­ing agency said.

More­over, the govern­ment re­cently passed leg­is­la­tion that should help the coun­try’s medium-term growth out­look, be­cause it will fur­ther dereg­u­late the food pro­cess­ing, re­tail, build­ing ma­te­ri­als and tourism sec­tors. Based on these trends and high fre­quency data, Moody’s fore­casts real GDP growth of +0.4% in 2014 and +1.2% in 2015.

The third driver of the up­grade de­ci­sion is that the pre­dom­i­nantly of­fi­cial cred­i­tor struc­ture of the govern­ment debt has al­lowed the re­duc­tion of the govern­ment’s in­ter­est bur­den and length­ened ma­tu­ri­ties fol­low­ing pre­vi­ous pri­vate-sec­tor debt re­struc­tur­ings and of­fi­cial sec­tor as­sis­tance.

The cred­i­tor struc­ture, where 82% of gen­eral govern­ment debt is held by the of­fi­cial sec­tor (mainly the IMF, EC, ECB and other euro area gov­ern­ments), and the debt pro­file that has evolved in con­se­quence, adds to the govern­ment’s fis­cal flex­i­bil­ity and re­duces re­fi­nanc­ing risks.

Moody’s con­sid­ers that Greece’s fis­cal out­look is more re­silient than in the past, given the im­prove­ment in the debt af­ford­abil­ity (in­ter­est ex­penses-to-rev­enues) to 10.1% in 2014 from 17.0% in 2011.

At 4% of GDP in 2013, in­ter­est-to-GDP is also in line with the euro area av­er­age. Greece’s debt-ma­tu­rity pro­file has also been length­ened to around 18 years in 2014, up from around 6.5 years in 2011.

Neg­a­tive fac­tors in­clude the high level of po­lit­i­cal un­cer­tainty with a high prob­a­bil­ity of early par­lia­men­tary elec­tions by Q1 2015, prompted by (1) the erod­ing ma­jor­ity of the coali­tion govern­ment; and (2) the con­sti­tu­tional rules sur­round­ing the Pres­i­den­tial ap­point­ment, which is due by Fe­bru­ary 2015.

This un­cer­tainty is height­ened by the am­bi­gu­ity as­so­ci­ated with the end of Euro­pean Com­mis­sion and IMF pro­grammes in De­cem­ber 2014 and Q1 2016, re­spec­tively.

Im­por­tant de­ci­sions will be made over the com­ing months re­lated to the fi­nanc­ing of the govern­ment’s fund­ing needs for 2015, the shape of the struc­tural ad­just­ment pro­gramme post 2016 and the struc­ture of fur­ther of­fi­cial­sec­tor debt relief.

Moody’s base case is that ex­ter­nal sup­port will still be forth­com­ing in some form; how­ever, the rat­ing agency be­lieves that the pri­mary sur­plus tar­gets un­der the cur­rent Troika pro­gramme are am­bi­tious and would prove de­mand­ing in the cur­rent so­cial and po­lit­i­cal en­vi­ron­ment. Con­se­quently, Moody’s ex­pects that the forth­com­ing ne­go­ti­a­tions with the of­fi­cial cred­i­tors will be chal­leng­ing and the risk that these ten­sions im­ply for cred­i­tors are in­cor­po­rated in the cur­rent rat­ing level.

These credit chal­lenges in­clude an am­bi­tious struc­tural ad­just­ment pro­gramme; a very high level of pub­lic debt and a bank­ing sys­tem that has high lev­els of non-per­form­ing loans (NPLs) and is un­sup­port­ive to eco­nomic growth; a track record of de­fault; and a chal­leng­ing po­lit­i­cal and so­cial en­vi­ron­ment, which com­pli­cates the im­ple­men­ta­tion of struc­tural re­forms.

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