ATHENS (Reuters) - Ratings agency Fitch upgraded its sovereign credit rating for Greece by one notch on Tuesday, citing the country's progress in cutting its budget deficit and the receding risk of its euro zone exit.
After nearly crashing out of the euro last year and coming under attack for stalled reforms, Greece has won praise in recent months from its international lenders for getting back on track and pushing through unpopular austerity measures.
"The price has been high in terms of lost output and rising unemployment and the capacity for recovery is still in doubt," Fitch said.
"Nonetheless, sovereign debt relief and an easing of fiscal targets have lifted central bank measures of economic sentiment to a three-year high and the risk of euro zone exit has receded."
The rating outlook is stable, Fitch said in a statement raising its rating to B-minus from CCC. It comes after Standard & Poor's also raised Greece's rating to B-minus with a stable outlook from selective default in December.
Moody's Investors Service has a C rating on the credit. All three are still deep in junk territory. Some analysts remain sceptical that things have turned a corner in Greece.
"Things are getting better but from a very low base," said Ben May, an analyst at Capital Economics in London.
"Greece is less on a knife's edge than it was months ago but I'm not sure the worst is over because the fundamental economic problems are still there."
The critical long-term goal for Athens is to bring its debt as a proportion of GDP down to a manageable size. The ratio currently stands at more than 160 percent. The IMF has said it must be cut to 120 percent by 2020 to be "sustainable".
"I would be cautious about saying Greece's problems are over, it's a real uphill struggle to get the GDP ratio to what the troika is forecasting," May said, referring to the trio of European Union International Monetary Fund and European Central Bank lenders.
Fitch said it expected a milder recession this year of 4.3 percent and a weak recovery in 2014, broadly in line with government and EU/IMF forecasts but warned that tangible economic recovery remained "elusive".
While progress has been made in structural reforms, particularly in the labour market, resistance to reform was high and highlighted persistent risks to implementing the bailout, the agency said.
Under Greece's bailout plan, Athens has to cut 150,000 public sector jobs overall from 2010 to 2015, about a fifth of the total, through hiring curbs, retirement and dismissals.
The government broke a taboo last month by agreeing to dismiss 15,000 public sector workers by the end of 2014 but lay-offs remain a sensitive issue in Greece.
The country's economy remains mired in its sixth year of recession and unemployment has topped 27 percent, but Greece is expected to hit fiscal targets required under its bailout this year and could qualify for further debt relief soon.
Greece's 10-year bond yields dropped on Tuesday to their lowest level since the country took an EU/IMF bailout in 2010 and Athens has said it could return to the bond market as early as the first half of next year.
Greek borrowing costs also fell to their lowest since April 2011 in a sale of 1.3 billion euros ($1.7 billion) worth of government Treasury bills on Tuesday.
(Reporting by Karolina Tagaris and Deepa Babington,; editing by Ron Askew)