Fitch downgrades Greece to BBB+ | FT Alphaville

Fitch downgrades Greece to BBB+

Greek banking stocks were off more than 6 per cent most of Tuesday morning, following a move by S&P to put the Hellenic Republic on creditwatch.

Fitch, however, acted a tad more decisively on the day, downgrading the sovereign to BBB+.

Here’s the bulk of the release (emphasis FT Alphaville’s):

Fitch Downgrades Greece to ‘BBB+’; Outlook Negative

Fitch Ratings-London-08 December 2009: Fitch Ratings has today downgraded Greece’s Long-term foreign currency and local currency Issuer Default Ratings (IDR) to ‘BBB+’ from ‘A-‘. The Outlook is Negative. The Short-term foreign currency (IDR) is downgraded to ‘F2’ from ‘F1’.

The Country Ceiling is affirmed at ‘AAA’, in line with the common country ceiling for euro area sovereigns. The downgrade reflects concerns over the medium-term outlook for public finances given the weak credibility of fiscal institutions and the policy framework in Greece, exacerbated by uncertainty over the prospects for a balanced and sustained economic recovery. Though it is probable that fiscal adjustment under the auspices of the Stability and Growth Pact will be sufficient to forestall penalties under the Excessive Deficit Procedure (EDP), Fitch’s current assessment is that the government debt burden is likely to rise to close to 130% of GDP before stabilising. Given the poor historical track record of public finance management, Fitch is not convinced that the substantive pension reform and other measures necessary to contain public spending pressures and broaden the tax base will be sufficiently strong to materially reduce debt over the medium- to long-term and hence Greece’s vulnerability to future adverse shocks.

While Fitch believes that the government’s target to narrow the fiscal deficit by 3.6pp of GDP to 9.1% in 2010 is achievable, the lack of substantive structural policy measures reduces confidence that medium term consolidation efforts will be aggressive enough to ensure public debt ratios are stabilised and then reduced over the next three to five years. Present government proposals rely more heavily on revenue-raising measures, particularly moves to counter tax evasion – where the pay off is highly uncertain – rather than current spending where structural fiscal weaknesses are most acute.

About half the proposed cuts in the deficit rely on temporary one-off measures, while little of the recent fiscal deterioration can be attributed to the economic downturn, which has been relatively mild, or to support for the financial sector which has been minimal.  In the face of downside risks to medium-term growth associated with Greece’s large current account deficit – which has seen GDP growth supported by strong capital inflows over the last few years – the likely rise in public debt to more than 120% of GDP next year and further to 125% in 2011 would leave the public finances highly exposed to shocks.

One such shock is the ageing population which, in combination with a highly generous and unreformed pension system, will lead to one of the largest projected increases in ageing-related expenditures – at 15% of GDP – in the EU between 2010 and 2050 according to the European Commission (EC).  Fitch recognises the efforts that the government has made to improve fiscal transparency and understands that further measures will be announced in January 2010 to support the reduction in the fiscal deficit to 3% of GDP by 2013 as recommended by the EC under the EDP, including supplementary fiscal measures to underpin realisation of the 2010 Budget deficit target.

The EC and European Council have already indicated that Greece will face a higher degree of surveillance and more detailed controls than other countries under the EDP.  Increased peer pressure from within the EU and EMU is likely to strongly influence policy choices in the near-term. However, sustained consolidation over the medium term will require enduring domestic political commitment to austere fiscal policies. Greece’s poor historical track record of reducing deficits and debt is evidenced most recently by the failure to reduce debt ratios over 2003 to 2008 despite strong growth and the sharp structural deterioration in the public finances in 2009.

Fiscal slippage relative to current plans could result in a further downgrade, while the emergence of a much stronger policy commitment and its consistent implementation could see the Outlook revised to Stable.  Greece’s sovereign ratings remain supported by its high-income economy relative to rating peers and membership of the EU and EMU which protects the economy from abrupt shifts in the balance of payments and currency pressures. The banking sector has also held up relatively well through the global crisis. Moreover, the average maturity of public debt at around eight years, despite increased short-term borrowing during the course of 2009, reduces the government’s exposure to interest rate shocks

Funnily enough, Greek bond spreads did not widen that much further following the Fitch announcement — having hit their widest since April earlier on Tuesday.

Since writing, Greek bank stocks have, however, extended losses to about 7.8 per cent — although again, the bulk of losses occurred earlier in the day.

Here meanwhile is the initial reaction of the Athens General Index:

Athens General index - Reuters

Related links:
CDS report: Greece under pressure again after downgrade threat
– FT Alphaville
The return of widening sovereign credit spreads
– FT Alphaville