DBRS down­grades Greece to CCC (high) neg­a­tive trend

Financial Mirror (Cyprus) - - FRONT PAGE -

DBRS, Inc. down­graded the Hel­lenic Repub­lic’s long-term for­eign and lo­cal cur­rency is­suer rat­ings to CCC (high) on Fri­day with a Neg­a­tive trend from B, and down­graded the short-term for­eign and lo­cal cur­rency is­suer rat­ings to R-5 with a Sta­ble trend from R-4. The rat­ings are no longer Un­der Re­view with Neg­a­tive Im­pli­ca­tions.

The de­vi­a­tion of this re­view from the next sched­uled pub­li­ca­tion date for rat­ings on June 12 is due to an in­crease in un­cer­tainty over gov­ern­ment poli­cies and Greece’s ca­pac­ity to re­main cur­rent on its debt. DBRS placed the rat­ings Un­der Re­view on Fe­bru­ary 4 to re­flect an el­e­vated con­cern over the po­ten­tial for a de­te­ri­o­ra­tion in cred­it­wor­thi­ness as a re­sult of ac­tions by the Greek gov­ern­ment fol­low­ing the gen­eral elec­tions on Jan­uary 25. In light of the change in gov­ern­ment, and given the im­por­tance of fi­nan­cial as­sis­tance from the Euro­pean Com­mis­sion, Euro­pean Cen­tral Bank and In­ter­na­tional Mon­e­tary Fund, DBRS’s con­cern over Greece’s abil­ity to meet its fi­nanc­ing needs had in­creased.

The cur­rent down­grade is due to a fur­ther in­crease in un­cer­tainty over whether Greece and its cred­i­tors will reach an agree­ment on a pro­gramme that re­stores macroe­co­nomic sta­bil­ity and im­proves Greece’s cash po­si­tion. In the ab­sence of an agree­ment, fi­nanc­ing sources ap­pear to be in­suf­fi­cient to meet Greece’s fi­nanc­ing needs over the fore­see­able fu­ture. This short­fall is due to the lack of ac­cess to bond mar­kets, as well as a de­lay in an agree­ment be­tween Greece and its of­fi­cial sec­tor cred­i­tors over the con­di­tions that the cred­i­tors re­quire in ex­change for con­tin­u­ing the ex­ist­ing fi­nan­cial as­sis­tance pro­gramme, or en­ter­ing a new longer term lend­ing pro­gramme.

DBRS’s view is that a new longer term pro­gramme is likely to be nec­es­sary to re­store macroe­co­nomic sta­bil­i­sa­tion.

The Neg­a­tive trend re­flects the risk of a missed pay­ment to of­fi­cial cred­i­tors, or the fur­ther buildup of ar­rears to do­mes­tic agents. In the com­ing weeks, Greece faces a se­ries of pay­ments to the IMF and the ECB. A de­fault to th­ese cred­i­tors would likely cause an ac­cel­er­a­tion in the with­drawal of de­posits from Greek banks, and would fur­ther un­der­mine growth prospects. This is turn would make it more dif­fi­cult for Greece to gen­er­ate pri­mary fis­cal sur­pluses. Such a de­fault could also jeop­ar­dise ECB Emer­gency Liq­uid­ity As­sis­tance (ELA), with­out which Greek banks could face lower liq­uid­ity buf­fers and run the risk of in­sol­vency.

Al­ter­na­tively, DBRS could move the trend to Sta­ble if Greece and its cred­i­tors agree on a fi­nan­cial as­sis­tance pro­gramme that re­stores liq­uid­ity and bol­sters macroe­co­nomic sta­bil­ity. This in turn would likely sta­bilise bank de­posits, i mprove fis­cal sus­tain­abil­ity and foster eco­nomic growth.

The ex­ist­ing fi­nan­cial as­sis­tance pro­gram, the sec­ond eco­nomic ad­just­ment pro­gramme, was ex­tended to June 30. If Greece meets the con­di­tions of the pro­gramme it would be el­i­gi­ble for a fi­nal tranche of EUR 7.2 bln. This would help Greece’s cash po­si­tion, but would be un­likely to re­move un­cer­tainty over fu­ture pay­ments. As part of the ex­ist­ing pro­gramme, the ECB and Sin­gle Su­per­vi­sory Mech­a­nism (SSM) could re­quest from the Euro­pean Fi­nan­cial Sta­bil­ity Fa­cil­ity (EFSF) an ad­di­tional EUR 10.9 bln, orig­i­nally trans­ferred to the Hel­lenic Fi­nan­cial Sta­bil­ity Fund (HFSF) in the form of EFSF bonds and sub­se­quently re­turned to the EFSF, to be trans­ferred back to the HFSF for the re­cap­i­tal­i­sa­tion and res­o­lu­tion of Greek banks, if nec­es­sary.

The cur­rent ne­go­ti­a­tions ap­pear to be fo­cused on two tech­ni­cal is­sues in the labour mar­ket and the so­cial se­cu­rity sys­tem. Ex­ces­sive re­stric­tions in the labour mar­ket main­tain a high cost of do­ing busi­ness, and in­hibit the estab­lish­ment or ex­pan­sion of large firms. Col­lec­tive dis­missals of work­ers are not al­lowed, and this forces firms to of­fer high sev­er­ance packages or re­sort to bank­ruptcy. The sec­ond is­sue is over re­duc­ing so­cial se­cu­rity con­tri­bu­tion rates, elim­i­nat­ing loop­holes, bet­ter tar­get­ing lower-end con­tri­bu­tions to re­duce the cost of do­ing busi­ness for firms and strengthen labour de­mand, and strength­en­ing the pen­sion sys­tem by im­prov­ing ef­fi­ciency, achiev­ing ac­tu­ar­ial bal­ance over the com­ing decades, en­sur­ing con­sis­tency with fis­cal tar­gets, and mak­ing other para­met­ric im­prove­ments.

The Greek ne­go­tia­tors have al­legedly agreed to har­monise value-added tax rates, im­prove tax col­lec­tion, and pri­va­tise a num­ber of state-owned en­ti­ties. How­ever, they have not agreed to make fur­ther changes to the labour mar­ket or so­cial se­cu­rity sys­tem. The im­pact of the de­lay in an agree­ment has been a liq­uid­ity squeeze, de­posit out­flows from Greek banks, a set­back in the eco­nomic re­cov­ery, and a slow­down in the fis­cal ad­just­ment. From July 2014 to March 2015, de­posits de­clined by EUR 33.7 bln, and are at their low­est level since Septem­ber 2005. If de­posit out­flows con­tinue, this could jeop­ar­dise fi­nan­cial sta­bil­ity and fur­ther lower prospects for eco­nomic growth, lead to a larger pri­mary fis­cal deficit, and im­pair debt sus­tain­abil­ity.

For the re­main­der of 2015, Greece’s obligations are mainly in the form of prin­ci­pal and in­ter­est charges on IMF loans, prin­ci­pal and in­ter­est pay­ments on bonds held mainly by the Eurosys­tem (the ECB and na­tional cen­tral banks within the euro area), and in­ter­est pay­ments on bi­lat­eral loans un­der the Greek Loan Fa­cil­ity (GLF).

At the same time, Trea­sury bill re­demp­tions and monthly public sec­tor wages and pen­sions are size­able. There are also min­i­mal prin­ci­pal and in­ter­est pay­ments on restruc­tured bonds held by the pri­vate sec­tor.

The cen­tral gov­ern­ment has also slipped into ar­rears with sup­pli­ers of goods and ser­vices to the public sec­tor. To im­prove its cash po­si­tion, it passed a de­cree on April 20 re­quir­ing lo­cal gov­ern­ments, state-owned com­pa­nies and public pen­sion funds to trans­fer their cash re­serves to the Bank of Greece.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.