Fitch: Greece’s rating based on completing program review well ahead of July

Greece’s current “CCC” rating is based on the assumption the country’s second program review will be completed well ahead of July, maintaining access to official funding, Fitch Ratings said in a press release on Monday, adding that the recurrent tensions between the country and its creditors are already reflected in its sovereign rating, which has been at current levels for nearly two years.

“The Greek government agrees with the IMF that debt relief is needed, but has objected to the Fund’s position that the government should pre-legislate for specific automatic fiscal correction measures if it misses future primary surplus targets. Even so, the current stand-off appears to be driven more by the inter-creditor disagreement,” Fitch said.

“Press reports suggest that the IMF and the Europeans have taken a common position on the size of the automatic measures, but details remain unclear, as does the Greek government’s response,” it added.

The agency commented that Greece has broadly met program conditions and recorded a primary surplus of 4.4 billion euros in 2016 thanks to higher-than-budgeted revenues. GDP rose 1.8 pct year-on-year in the third quarter of 2016, the largest annual increase in over eight years. “This progress is one reason that we think Greece’s European creditors would be prepared to proceed with the second review and to disburse funds without IMF involvement. Another reason is their desire to avoid a Greek political crisis during an already congested election year in Europe,” Fitch said.

Completing the second program review and disbursing the associated ESM funds would enable Greece to meet its July maturities, which total more than 6 billion euros (including 3.9 billion to the European Central Bank). Doing so in a timely fashion and avoiding the level of brinksmanship of the first half of 2015 would reduce the risk that Greece’s economic recovery is undermined by a hit to confidence or by the Greek government building up arrears to conserve liquidity, the agency said.

It also warned that recent events highlight that political risk remains a sovereign rating weakness for Greece, despite positive economic and fiscal developments. Fitch’s next cheduled review is due on 24 February.