Greece’s bailout pro­gramme pro­vides credit sup­port but eco­nomic and fis­cal chal­lenges still el­e­vated

Financial Mirror (Cyprus) - - FRONT PAGE -

Con­di­tions in Greece have sta­bilised un­der the third bailout pro­gramme and sup­port the sta­ble out­look on Greece’s Caa3 rat­ing. How­ever the im­ple­men­ta­tion risks linked to the bailout con­di­tions are still high, un­der­scor­ing the coun­try’s eco­nomic and fis­cal chal­lenges, Moody’s In­vestors Ser­vice said in its an­nual Credit Anal­y­sis on Greece on Tues­day.

Greece suc­cess­fully con­cluded the first re­view of its third bailout pro­gramme in June. How­ever, the im­ple­men­ta­tion risks as­so­ci­ated with the bailout pack­age re­main el­e­vated, given the gov­ern­ment’s slim ma­jor­ity in par­lia­ment and the weak track record and ca­pac­ity of ad­min­is­tra­tion to ex­e­cute re­forms.

Moody’s fore­casts that the Greek econ­omy will con­tract by 0.7% of GDP this year, be­fore re­turn­ing to growth es­ti­mated at 1.8% in 2017. In the short-term much will de­pend on the timely clear­ance of gov­ern­ment ar­rears to the pri­vate sec­tor, which stand at EUR5.5 bil­lion as of April 2016 (3% of GDP).

The out­come of the elec­tion in Septem­ber 2015 and the suc­cess­ful con­clu­sion of the first re­view of Greece’s third bailout pro­gramme in June 2016 the pub­lic leg­is­lated mean that the risk of sce­nar­ios in­volv­ing either an im­passe with of­fi­cial cred­i­tors and/or a deeper re­ces­sion re­sult­ing from pro­longed un­cer­tainty has di­min­ished some­what.

Moody’s ex­pects that Greece’s gen­eral gov­ern­ment debt ra­tio will peak this year at 182.8% of GDP. While the level is high, the struc­ture of Greek pub­lic debt and debt-ser­vic­ing re­quire­ments re­main be­nign.

Up­side po­ten­tial could stem from fur­ther of­fi­cial sec­tor debt re­struc­tur­ing, which will only be con­sid­ered af­ter the cur­rent bailout pro­gramme ex­pires, and re­mains con­tin­gent on both euro area ap­proval and the Greek gov­ern­ment’s abil­ity to suc­cess­fully i mple­ment the agreed fis­cal and struc­tural re­forms.

More­over, the bank­ing sec­tor re­mains weak. Although banks have re­cently been re­cap­i­tal­ized, as­set qual­ity chal­lenges re­main a con­cern. Moody’s ex­pects an in­crease in non-per­form­ing loans in 2016, reach­ing close to around 40%.

Poor as­set qual­ity in the fi­nan­cial sec­tor will likely cause in­vest­ment growth to re­main low. As a re­sult, con­sump­tion and net ex­ports will con­tinue to drive eco­nomic ac­tiv­ity.

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