Fiscal risk has increased for Greece
International rating agencies harbor serious concerns over the consequences of the government’s pre-election announcements on the Greek economy, suggesting that the handout talk is likely to impede efforts to help Greece get back to investment-grade status.
For the rating agencies, the extensive and rapid reversal of reforms in the post-bailout surveillance program is one of the factors that could have a negative impact on the country’s assessment, while it is certain that it will generate tension with Greece’s creditors – as will become evident at June’s Eurogroup – damaging investor confidence.
As the agencies’ chief analysts for Greece warned while speaking to Kathimerini, the fiscal risk for this country has increased and sanctions by the creditors are a certainty; they are likely to freeze any further easing of the national debt, and they may even block the early repayment of the expensive loans from the International Monetary Fund.
As Marko Mrsnik, director of the European Sovereign Ratings Group at Standard & Poor’s, told Kathimerini, “in our most recent research update we have already foreseen that given the upcoming busy electoral period, the political maneuvering of the government, for example via higher government spending, could lead to lower compliance with its expenditure ceiling and with its commitments with the budgetary targets agreed at the time of the termination of the European Stability Mechanism program.”
“In this context, a reduction in the primary surplus target could lead to non-execution of further debt relief or the return of ANFA/SMP profits from Greek bonds held by the European Central Bank and the European System of Central Banks (ESCB) – this agreement was based on the primary surplus target of 3.5 percent of gross domestic product until 2022,” he said.
“At the same time, it is worth pointing out that in 2018, these primary balance data reached 4.4 percent of GDP, significantly outperforming the target agreed with the creditors of 3.5 percent of GDP, and above the government’s own target of 4 percent of GDP. The overperformance against the government’s own target occurred despite a delayed payment to the government for the concession of Athens International Airport that occurred earlier this year,” noted Mrsnik.
He stressed that “ongoing debt relief and the return of these profits are subject to ongoing compliance with the program’s objectives. We therefore believe that the Greek authorities will have strong incentives to avoid backtracking markedly on most previously legislated reforms. In this context, we note that despite occasional delays, the authorities have so far complied with the commitments made regarding a series of post-program actions which led to a decision by the Eurogroup on the disbursement of profits on ESCB holdings of Greek government bonds in early April.”
The S&P analyst went on to warn that, “as stated in the ‘outlook’ section of our report, we could revise the outlook from ‘positive’ to ‘stable’ if, in contrast to our expectations, there are reversals of previously implemented reforms, or if growth outcomes are significantly weaker than we expect, restricting Greece’s ability to continue fiscal consolidation, debt reduction, and financial sector restructuring.”
It should be noted that Fitch Ratings wrote in an extraordinary report last week that the new package of handouts represents a greater and faster reversal of policy than what was anticipated; it added that the handouts increase uncertainty about Greece’s medium-term political attitude and fiscal state, and are expected to provoke a clash with the creditors. Fitch further warned that this situation could weaken the confidence of the markets in Greece and raise the cost of the country’s financing.
For its part, Moody’s noted in its recent rating report that its “stable” outlook for Greece means there is a relatively low risk of any political or fiscal reversal. Yet it also warned Greece’s rating could be downgraded if the reform momentum appears to slow with the reversal of important reforms or the adoption of policies that will lead to substantially weaker fiscal results.
Kathrin Muehlbronner, senior vice president at Moody’s Investors Service, told Kathimerini: “The government has penciled in a significant outperformance into its 2019 budget, and our baseline scenario remains that the primary fiscal surplus will be 3.5 percent of GDP this year. That said, significant new spending commitments this early in the year naturally imply risks to achieving such targets. We will continue to monitor fiscal developments very closely, in particular with regard to reversals of previously enacted reforms or material weakening of the fiscal stance.”
For Canada-based rating agency DBRS, compliance with the agreed fiscal targets and continued cooperation with the EU partners is important for Greece’s restoration of full market confidence and for the rating.
The agency’s co-head of Sovereign Ratings, Nichola James, told Kathimerini: “We have to wait to see the decision about the third post-program review at the Eurogroup meeting on June 13. For DBRS, it is important to understand the Eurogroup’s interpretation of the measures and the government’s intention to reduce the 2020-22 fiscal targets from 3.5 percent to 2.5 percent of GDP. Greece does have some limited fiscal capacity resulting from overperformance on its fiscal targets in past years. Another factor, as a result of the package announced by the government, is any concern that the creditors may deem it prudent to postpone Greece’s plan to repay 3.7 billion euros of IMF loans.”
“At the same time, DBRS views the Eurogroup’s assessment of Greece’s commitment to continue and to complete key reforms to raise medium-term growth prospects as important in the assessment of Greek sovereign risk,” James concluded.
