S&P revises Greece’s Long Term ratings to B-‘ from ‘CCC+’ on Stable Outlook

The upward revision is mainly attributed to the agency’s expectation that Greece will meet the conditionality attached to the €86bn bailout program, opening the way for discussions on official debt relief, despite the differences between the government and its creditors.

S&P raised the short-term foreign and local currency sovereign credit ratings to ΄B΄ from ΄C΄. In particular, by the end of March the agency expects a compromise to be reached on pension reform that will balance the government’s preference to raise social security contributions and consolidate the separate pension funds into a single system, with creditors’ and the IMF’s focus on spending cuts to narrow an unsustainably high pension deficit, currently estimated at 9% of GDP. An impending agreement on pension reform, leading to the successful conclusion of the first review of the program, would raise the possibility of additional relief on the official portion of Greece’s general government debt.

S&P projections for the Greek economy call for one more year of essentially flat growth, followed by a more robust recovery. According to the agency, there is also a possibility that the banking system, including smaller financial institutions, could eventually require capital support. Nevertheless, in their opinion, the recapitalization exercise has contributed to Greece’s financial stability while considerably lowering the risk that further financial sector contingent liabilities will crystallize on the government’s balance sheet. S&P forecasts a primary surplus of 0.4% of GDP this year (versus the 0.5% target), increasing to close to 2% by 2019. One risk to fiscal targets this year is last year’s Council of State decision declaring that pension cuts introduced in 2012 were unconstitutional. The agency also estimates that last year’s current account shifted into surplus, while they expect Greece’s current account will shift back into deficit as demand recovers over the next few years, though oil prices, should they remain at current levels, could improve the current account position this year by as much as 2% of GDP. They also anticipate the capital account to remain substantially in surplus over the forecast horizon.

S&P expects any re-profiling of Greece’s official debt to come in the form of interest rate deferrals, and maturity extensions. Should the first review be completed successfully, they anticipate that the small amount of Greek government bonds still in the market is likely to become eligible for QE purchases by the Bank of Greece. In addition, a potential decision by the ECB to reinstate its waiver on the eligibility of Greek sovereign and sovereign guaranteed bank collateral for ECB financing would benefit the profitability of Greece’s banking system. The agency, however, anticipates an only gradual lifting of the capital controls still in place, including withdrawal limits on household deposits.

S&P could consider an upgrade if they saw stronger growth performance, and measureable progress in the reduction of the NPL levels in Greece’s banking system, alongside the lifting of capital controls including deposit withdrawal limits, which would be a strong indication of a recovery of confidence in financial stability and hence growth. They could also consider raising the rating on the back of an unexpected write-down of Greece’s level of net general government debt. On the other hand, the agency could lower the ratings on Greece if the new government cannot implement the reforms it has agreed to in the MoU between itself and the ESM. Prolonged implementation problems with the ESM program could eventually lead to a general default on the government’s debt.