Fitch: Eurogroup’s decision for Greece indicates improved relations with its creditors

The Eurogroup’s decision to disburse bailout funding to Greece indicated improved relations with its creditors, Fitch Ratings said in a press release on Tuesday. The 1.7 billion euros due to be disbursed for arrears clearance later in October supported forecasts for a “moderate pick-up of GDP” in the current year, followed in 1.8 pct growth in 2017, the rating agency said.

At the same time, the decision also indicated the “continuing challenges to programme implementation,” Fitch noted and warned that the “risk that the programme goes off track remains high”.

“Progress in meeting the milestones has been slower than expected, even though they are less demanding than the earlier measures required under the first programme review, such as pension and income tax reform. We think this reflects the Greek government’s competing policy priorities and relatively weak domestic political ownership of the programme.”

“The majority of the milestones were legislated over the last month, in a single bill, with the earlier delay underlining the government’s slim majority and ideological opposition in parliament to some programme reforms,” the press release said.

Fitch Ratings said that labour market reform would probably prove the toughest component of the second programme review and predicted that the negotiations on this might slip into next year, while noting that the prospect of debt relief could play a key role as primary budget surplus targets became harder to meet:

“The prospect of government debt relief could become an important driver of programme compliance if it incentivises the Greek authorities to meet programme conditions. However, we think it could have the opposite effect if the Greek government and population come to view substantial debt relief as distant or unlikely.”