Fitch says Greek deal positive but risks remain
Global rating agency Fitch says the announcement of an agreement aimed at securing Greek debt sustainability and allowing the next disbursement of financial aid eases the immediate threat of a Greek sovereign default or eurozone exit.
This is positive for Greece and for other eurozone sovereigns. The deal could help put Greece's sovereign debt on a sustainable footing, although key questions remain to be answered, and implementation risk is high.
Phased debt service relief measures - notably further cuts in interest rates on the Greek Loan Facility of 100bp and a 10-year deferral of interest payments by Greece on European Financial Stability Facility (EFSF) loans - and the remittance of European Central Bank profits on the Securities Markets Programme portfolio, combined with a possible debt buyback, should help to close fiscal financing gaps and put Greece's debt/GDP ratio back on track.
We estimate that debt service relief, ECB remittances, and an allocation of EUR10bn to buy back bonds from private sector creditors at approximately 35 cents in the euro, could see debt/ GDP peak at around 179% in 2014, before declining to 124% in 2020, broadly in line with the eurogroup's own projections.
Tuesday's agreement recognises the huge political capital expended in securing Greek parliamentary approval for additional austerity measures, and confirms that the eurogroup is still thinking of solutions to the Greek crisis that will keep the country in the eurozone.
If the next EFSF disbursement of EUR43.7bn ( EUR10.6bn for budgetary financing and EUR23.8bn in EFSF bonds earmarked for bank recapitalisation in December and the remainder in the first quarter of next year) takes place as envisaged, it will provide much needed liquidity to cover deficits, pay down arrears, and continue to recapitalise Greek banks. The December disbursement requires approval by eurozone national parliaments and a review of the possible buyback, while Greece must meet agreed milestones (including implementation of tax reform by January) to be agreed by the Troika, to receive the Q113 payments.