Greece sovereign ratings lowered; outlook revised to negative

Capital Intelligence has lowered Greece’s long-term foreign currency rating to BBB+ from A and its short-term foreign currency rating to A2 from A1.
The outlook on the long-term rating – which indicates the likely direction of the rating over the next 12-24 months – has been revised to ‘Negative’ from ‘Stable’, the international credit rating agency said.
In line with this action, the long-term foreign currency ratings of four Greek banks – Alpha Bank, EFG Eurobank Ergasias, National Bank of Greece, and Piraeus Bank – have also been lowered to BBB+ with a ‘Negative’ outlook. The ratings of the three other Greek banks – Agricultural Bank of Greece, Attica Bank, and the Greek Postal Savings Bank – are under review.
The downgrade of and ‘Negative’ outlook on the sovereign’s rating reflect a more marked deterioration in Greece’s public finances than previously expected and doubts about the government’s capacity to engineer a sustained reduction in the budget deficit and reverse currently worsening public debt dynamics over the medium term. The ratings adjustment also takes into account increased refinancing risk associated with a rising debt service burden and weaker investor confidence.
The general government budget deficit rose sharply in 2009 to an officially estimated 12.7% of GDP from 7.7% in 2008, while government debt is expected to have reached 113% of GDP (289% of revenue), up from 99% (244%) a year earlier. The gaping fiscal deficit is attributable to both cyclical and structural factors and also to substantial revisions to fiscal data, which has again highlighted the severe shortcomings of the Greek public accounting system.
The government intends to reduce the budget deficit to 8.7% of GDP in 2010 and to below 3% by 2012 and foresees the debt ratio peaking at 121% in 2011 and declining thereafter.
CI expects the envisaged fiscal adjustment to be politically challenging and considers the risk of slippage to be high. Cross-party support for the first raft of planned measures – which include hikes in excise duties and steps to cut the government wage bill – suggests that a substantial decrease in the budget deficit, albeit to still unsustainably high levels, is achievable this year. CI is nevertheless sceptical about the durability of the apparent political consensus and is not yet convinced that the government will be able or willing to implement deficit-reducing reforms on a multi-year basis. Many of the planned measures, some which are temporary, are to be implemented in 2010 and the government has so far provided few details about the structural fiscal reforms that will be needed in the future to return the public finances to a stable path and increase its currently diminished capacity to cope with adverse economic shocks.
CI noted that the growing debt stock has increased the budget’s sensitivity to interest rates and to shifts in investor sentiment. Interest payments are budgeted to absorb a comparatively high 12% of total revenue in each of the next three years, but the rising cost of market access indicates an upside risk to these estimates and could make it much harder for the government to bring the budget deficit down as planned.
The government has not encountered any significant funding problems, but it would be vulnerable to a deterioration in market confidence. CI believes that in the event of a severe liquidity shock there is a strong likelihood that adequate financial assistance would be forthcoming from EU institutions and member states.