Greece’s political unrest exposes constraints reflected in low rating

Greece's current political unrest highlights the fragility of the country's institutions, which underpins its comparatively low sovereign rating, with Malta the lowest among euro area sovereigns, Moody's Investors Service said in a special comment. Moreover, the global financial and economic crisis is eroding the country's fiscal margin for manoeuvre.
"The Greek governments is constrained by a large public debt, as well as by the combined effects on its balance sheet of a sharp economic slowdown, support to the banking sector, and a rise in its relative cost of funding — all of which make it more difficult for the government to respond to popular demand in the context of the riots that began in Athens on December 6," explained Arnaud Mares, a Senior Vice President in Moody's Sovereign Risk Group.
"The current deadlock between the government and the demonstrators is exposing a vulnerability that underpins the relatively low level of Greece's A1 rating: namely, the inability to build up a social and political consensus needed for reform."
Moody's understands that the riots are the consequence of widespread discontent, mainly among Greece's youth, regarding their economic and social prospects, and dissatisfaction with the government. However, the roots of the turmoil do not rest with the current government alone, but rather with a deeper and broader mistrust and disappointment with the political establishment.
Moody's also notes that Greece's margin for fiscal flexibility will erode if the current widening of its borrowing costs relative to other European countries were to be sustained.
"In a country where public debt amounts to 93% of GDP, and where interest payments amount to 11% of government revenues, such an erosion of fiscal flexibility could have a material impact and would reduce the likelihood of an upgrade of Greece's rating to the Aa range," said Mares.
Moody's believes that the combination of a political situation that does not bode well for economic reform, and an economic situation that restricts the margin for manoeuvre of the government even further will likely reverse Greece's recently favourable trajectory of public debt metrics.
However, Moody's said it does not base its ratings on debt levels per se and will monitor both the political and economic situations closely to assess whether the erosion of fiscal space for the Greek government is temporary or more permanent in nature.