DBRS Inc. on Thursday placed the Hellenic Republic’s long-term foreign and local currency issuer ratings of B and short-term foreign and local currency issuer ratings of R-4 “under review with negative implications”.
While the next scheduled date for ratings on Greece is June 12, 2015, the deviation has been caused by DBRS’s elevated concern over the potential for a deterioration in Greece’s creditworthiness as a result of actions of the new government following the general elections on January 25, and subsequent developments. Reviews are typically concluded within three months.
In light of the change in government in Greece, and given the importance of financial assistance from the Troika (European Commission, European Central Bank and the International Monetary Fund), DBRS’s concern over Greece’s ability to meet its financing needs has increased.
“Uncertainty has risen over whether the new government will come to an agreement with the Troika on extending the existing financial assistance programme, or entering a new one,” the rating agency said in an announcement.
“This is because of the new government’s proposals to change the fiscal adjustment terms and restructure the debt. Responses by various parties across Europe regarding such renegotiations have not been encouraging in terms of the likelihood of reaching an agreement on a new programme,” it added.
DBRS said that the impact of this uncertainty is evident in the deterioration in financial market conditions, with wider spreads on Greek bonds and deposit outflows from Greek banks. In December 2014, deposits declined by €5.4 bln, and they likely declined further in January and February. If negotiations over the terms of financial assistance are protracted, and deposit outflows continue, this could jeopardise financial stability, as well as lower prospects for economic growth and debt sustainability.
The review, that according to DBRS normally takes “up to 3 months” will focus on progress in the negotiations with the Troika, implementation of the government’s proposals for restructuring public debt, adjusting public finances while fostering economic activity and employment, and financial market conditions, including bank deposits and spreads on Greek government bonds.
Downward pressure on the ratings would likely result if these factors continue on a negative trajectory, indicating deterioration in Greece’s ability or willingness to meet its debt payments.
“A return to a Stable trend on the ratings would become more likely if there is progress on ensuring Greece’s access to official funding flows that cover its financing needs, and developing a longer term plan to maintain fiscal discipline, foster growth, and stabilise debt-to-GDP,” DBRS said.
Although the new government recognises the importance of maintaining a primary surplus, it has articulated that it will not seek to extend the current programme given that it views the conditions as negative for growth and employment. Instead, by the end of February it aims to propose a four-month €1.9 bln bridging programme until June 1, with the ECB providing liquidity to Greek banks. During this four-month period, Greece would swap outstanding bonds for new growth-linked bonds.
A “menu of debt swaps” would include two types of new bonds, DBRS said: the first would be indexed to nominal GDP growth and would replace existing EFSF loans; the second would be “perpetual bonds” and would replace ECB-owned Greek bonds.
Greece has not mentioned any proposal to restructure private sector bonds, the rating agency said.
“Initial indications are that these proposals, once formally submitted, would not be acceptable to several members of the Troika and associated governments. It is important for the ratings that both sides find a solution, while Greece has indicated that it intends to remain in the Eurozone and European leaders have similarly indicated that Greece belongs in the Eurozone.”
“This mutual position suggests that an agreement could be forthcoming, possibly with some rearrangement of official sector loans to Greece,” DBRS concluded.
As regards debt repayments this year, Greece has central government gross refinancing needs of close to €30 bln. Of this, about €12 bln is in Treasury bills, €6.7 bln is due to the ECB securities markets programme, and €8.6 bln is due to the IMF.
In March, €4.3 bln of debt repayments fall due; in July and August, more than €6 bln fall due.
However there is an even closer deadline: the expiration on February 28 of the existing technical extension of the European Financial Stability Facility’s Second Economic Adjustment Programme. In the absence of a new programme, Greece could lose access to additional disbursements from official sources, and Greek banks could lose access to ECB emergency liquidity assistance.
