- Standard & Poor's Ratings Services has updated its assessment of the political, economic, and budgetary
challenges that the Greek government faces in its efforts to place
Greece's public debt burden onto a sustained downward trajectory.
- We are lowering our ratings on Greece to 'BB+/B' from 'BBB+/A-2' and
assigning a negative outlook.
- The negative outlook reflects the possibility of a further downgrade if
the Greek government's ability to implement its fiscal and structural
reform program materially weakens in our view, undermined by domestic
political opposition at home or by even weaker economic conditions than
we currently assume.
Standard & Poor's Ratings Services
said today that it has lowered its long- and short-term sovereign credit
ratings on the Hellenic Republic (Greece) to 'BB+' and 'B', respectively, from
'BBB+' and 'A-2'. The outlook is negative. At the same time, we assigned a
recovery rating of '4' to Greece's debt issues, indicating our expectation of
"average" (30%-50%) recovery for debtholders in the event of a debt
restructuring or payment default. The 'AAA' transfer and convertibility
assessment is unchanged.
"The downgrade results from our updated assessment of the political, economic,
and budgetary challenges that the Greek government faces in its efforts to put
the public debt burden onto a sustained downward trajectory," said Standard &
Poor's credit analyst Marko Mrsnik.
We believe that the government's policy options are narrowing because of
Greece's weakening economic growth prospects, at a time when pressures for
stronger fiscal adjustment measures are rising. Moreover, in our view,
medium-term financing risks related to the government's high debt burden are
growing, despite the government's already sizable fiscal consolidation plans.
Our updated assumptions about Greece's economic and fiscal prospects lead us
to conclude that the sovereign's creditworthiness is no longer compatible with
an investment-grade rating.
As a result of Greece's rising commercial borrowing costs, the authorities
have requested extraordinary support from the Eurozone and the International
Monetary Fund (IMF). We anticipate further information in the coming weeks
from EU members regarding the terms and duration of support for Greece. We
believe that a multiyear European Economic & Monetary Union (EMU)/IMF support
program is likely, which should, in our opinion, significantly ease Greece's
near-term liquidity challenges. Nevertheless, in our view, pressures for more
aggressive and wide-ranging fiscal retrenchment are growing, in part because
of recent increases in market interest rates. In our revised projections, we
forecast Greece's net general government debt-to-GDP ratio reaching 124% of
GDP in 2010 and 131% of GDP in 2011.
We continue to believe that the size and scope of the Greek government's
fiscal consolidation program, and the government's political will to implement
it, are the main drivers of our sovereign ratings on Greece. Sustained success
in this regard could, in time, be reflected in lower market interest rates on
Greece's debt. Early indications show that the government is likely to meet
its 2010 deficit target. The authorities are also moving ahead with their
structural reform agenda, adopting tax reform in April, while proposals on
pension reform are expected in May.
Nevertheless, we believe that the dynamics of this confidence crisis have
raised uncertainties about both the government's administrative capacity to
implement reforms quickly and its political resolve to embrace a fiscal
austerity program of many years' duration. Based on our updated assessment, we
estimate that the adjustment needed in Greece's primary fiscal balance
relative to that of 2008 in order to stabilize the government debt burden
amounts to at least 13% of GDP--a very high level compared with that which
other sovereigns have been able to achieve. The government's resolve is
likely, in our opinion, to be tested repeatedly by trade unions and other
powerful domestic constituencies that will be adversely affected by the
government's policies. At the same time, we expect official lender support to
be highly conditional and revocable, and as such, we do not believe that it
provides a floor under Greece's sovereign ratings.
As previously noted, the government's multiyear fiscal consolidation program
is likely to be tightened further under the new EMU/IMF agreement. This, in
our view, is likely to further depress Greece's medium-term economic growth
prospects. Under our revised assumptions (see below), we expect real GDP to be
nearly flat over 2009-2016, while the level of nominal GDP may not regain the
2008 level until 2017. Moreover, we find that Greece's fiscal challenges are
increasing pressures on the banking and corporate sectors. In particular, we
see continuing fiscal risks from contingent liabilities in the banking sector,
which could in our view total at least 5%-6% of GDP in 2010-2011.
Greek Government Economic Scenarios And Standard & Poor's Updated Baseline
Scenario
Average 2010-2013 Greek SGP 1 Greek SGP 2 S&P baseline
Real GDP growth (% yoy) 1.4 0.9 (0.8)
Nominal GDP growth (% yoy) 3.4 2.7 0.0
General gov't. deficit (% GDP) 4.8 4.8 5.8
CA deficit (% GDP), 2013 6.0 6.4 0.0
Gov't. debt/GDP (%), 2013 113 113 137
SGP--Stability and Growth Program (January 2010). Greek SGP 1--Greek
government's base case. Greek SGP 2--Greek government's alternate scenario.
yoy--Year on year. CA--Current account.
Together with the lowering of our ratings on Greece to 'BB+/B', we have also
assigned a recovery rating of '4' to Greece's debt. This is in keeping with
our policy to provide our estimates of likely recovery of principle in the
event of debt restructuring or a debt default for issuers with a
speculative-grade rating. A recovery rating of '4' reflects our current
expectation of "average" (30%-50%) recovery for holders of Greek government
debt.
"A further downgrade is possible if, in our view, the Greek government's
ability to implement its fiscal and structural reform program is undermined by
domestic political opposition or materially weakens for other reasons,
including even weaker economic conditions than we currently assume," said Mr.
Mrsnik.
We could revise the outlook to stable if we perceive that political support
for government economic policies remains robust and Greece's economic growth
prospects prove to be more benign than we currently anticipate.
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