Re­turn­ing to growth

Financial Mirror (Cyprus) - - FRONT PAGE -

DBRS, Inc. (DBRS) has con­firmed the Hel­lenic Repub­lic’s long-term for­eign and lo­cal cur­rency is­suer rat­ings at CCC (high) with a Sta­ble trend. DBRS has also con­firmed the short-term for­eign and lo­cal cur­rency is­suer rat­ings at R-5 with a Sta­ble trend.

The Sta­ble trend re­flects our view that the cur­rent fi­nan­cial sup­port pro­gramme is re­in­forc­ing the sta­bil­i­sa­tion of the Greek econ­omy and bank­ing sec­tor. The three-year EUR 86 bil­lion Third Ad­just­ment Pro­gramme has eased the liq­uid­ity squeeze and, fol­low­ing Greek par­lia­men­tary ap­proval of the lat­est fis­cal and struc­tural mea­sures in the first pro­gramme re­view last month, ap­pears to cover the re­main­der of this year’s debt ser­vice pay­ments. This should help fos­ter the econ­omy to re­turn to growth.

How­ever, given Greece’s so­cial and political con­straints to meet­ing the pro­gramme ob­jec­tives, there is a risk of de­lays in fund­ing sup­port in 2017 should Greece fail to com­ply with the sec­ond pro­gramme re­view, to be con­cluded in Oc­to­ber 2016. The pro­gramme has set am­bi­tious tar­gets that will re­quire sus­tained fis­cal con­sol­i­da­tion and struc­tural re­forms. Im­ple­men­ta­tion risk and large ex­ter­nal im­bal­ances make the re­cov­ery frag­ile and ex­poses Greece to shocks.

Greece’s credit strengths in­clude the ben­e­fits the coun­try en­joys from Eu­ro­zone mem­ber­ship and ac­cess to fi­nan­cial sup­port from Euro­pean in­sti­tu­tions. Since 2009, the coun­try has en­acted a large fis­cal ad­just­ment, and has made progress in re­form­ing the la­bor mar­ket, im­prov­ing the tax code and stream­lin­ing pub­lic ad­min­is­tra­tion. The ex­ter­nal sec­tor has also shown sus­tain­able im­prove­ment, with the con­ver­sion of the cur­rent ac­count from a large deficit into a small sur­plus.

How­ever, Greece con­tin­ues to face con­sid­er­able chal­lenges in restor­ing fi­nan­cial sta­bil­ity and re­turn­ing to sus­tain­able growth while con­sol­i­dat­ing pub­lic fi­nances un­der a frag­ile coali­tion govern­ment. Af­ter a delay of sev­eral months, the rul­ing SYRIZA-ANEL coali­tion has ap­proved most of the con­di­tions of the sup­port pro­gramme. How­ever, meet­ing the fis­cal and struc­tural re­form ad­just­ments of the pro­gramme amid so­cial con­straints and a slim three-seat ma­jor­ity in the par­lia­ment will be chal­leng­ing.

Fol­low­ing the re­cap­i­tal­iza­tion of the bank­ing sec­tor in 2015, bank bal­ance sheets re­main weak. Non-per­form­ing loans are high, there has been a per­sis­tent with­drawal of bank de­posits, and bank cap­i­tal con­tains a high per­cent­age of de­ferred tax as­sets. Com­bined with cap­i­tal con­trols that have yet to be dis­man­tled, th­ese con­di­tions have pre­vented an eas­ing of fi­nan­cial con­straints, and both the sup­ply and de­mand for credit has re­mained low.

Given the high de­pen­dence on of­fi­cial sec­tor fi­nanc­ing, trig­gers to a rat­ing up­grade in­clude on­go­ing co­op­er­a­tion be­tween Greece and the in­sti­tu­tions to en­sure vi­able poli­cies in re­turn for cash in­jec­tions, and mea­sures that smooth the debt ser­vic­ing pro­file and fa­cil­i­tate the pay­ment of pub­lic sec­tor ar­rears. Struc­tural re­forms that en­hance prod­uct mar­kets to raise po­ten­tial GDP growth, and struc­tural fis­cal ad­just­ment mea­sures such as broad­en­ing the tax base and re­duc­ing spend­ing on wages and pen­sions, would im­prove cred­it­wor­thi­ness. (The pro­gramme in­cludes a pro­vi­sion to cut pen­sion spend­ing by 1% of GDP this year.)

Strength­en­ing bank bal­ance sheets to fa­cil­i­tate the sup­ply of credit to the econ­omy would put fur­ther up­ward pres­sure on the rat­ings.

Down­ward pres­sure on the rat­ings could re­sult in the event of political in­sta­bil­ity that jeop­ar­dises re­la­tions with the in­sti­tu­tions, call­ing debt ser­vic­ing into ques­tion; sig­nif­i­cant fis­cal slip­page or a re­ver­sal of re­forms; or an in­abil­ity to weather ex­ter­nal shocks, such as a UK vote to leave the EU on June 23.

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