May 15, 2015 / 8:07 PM / 2 years ago

Fitch Affirms Greece at 'CCC'

(The following statement was released by the rating agency) LONDON, May 15 (Fitch) Fitch Ratings has affirmed Greece's Long-term foreign- and local currency Issuer Default Ratings (IDRs) at 'CCC'. The issue ratings on Greece's senior unsecured foreign and local currency bonds have also been affirmed at 'CCC'. The Short-term foreign currency IDR is affirmed at 'C'. The Country Ceiling has been affirmed at 'B-'. KEY RATING DRIVERS The affirmation reflects the following key rating drivers: Lack of market access, uncertain prospects of timely disbursement from official institutions, and tight liquidity conditions in the domestic banking sector are putting extreme pressure on Greek government funding. We expect that the government will survive the current liquidity squeeze without running arrears on privately-held bonds, but default is a real possibility. The damage to investor, consumer, and depositor confidence has derailed Greece's economic recovery. The damage will take time to repair even if prospects for a successful programme completion improve over the coming days or weeks. We forecast no real GDP growth this year, with risks heavily tilted to the downside. Liquidity conditions faced by firms will have worsened substantially, in our view, due to increased government arrears to suppliers and bank funding strains. The agreement reached in February to extend the EFSF programme to end-June after several weeks of brinkmanship supports our base case that Greece and its creditors will ultimately reach a compromise deal. As a minimum requirement, we expect that the Eurogroup will want the Greek government to demonstrate that it has taken some legislative action on structural reform before funds are disbursed. However, as yet, the reforms themselves have not yet been agreed. Time is therefore running short. Greece faces repayments to the IMF of EUR1.5bn in June. Debt repayments in July and August rise to EUR4.0bn and EUR3.2bn, respectively, primarily because bonds held by the Eurosystem fall due. We expect the government to continue to run arrears to suppliers to partially offset weaker than budgeted cash revenues. It has told local authorities to transfer reserves held in commercial banks to the Bank of Greece, citing "extremely urgent and unforeseen needs." Despite this move, the government's cash balances are now critically low. Large-scale deposit outflows from Greek banks (we estimate a 16% decline in the deposit base since end-November) have added to pressures on the Greek economy. The 'ccc' Viability Ratings of the four main domestic banks reflect the strain the current crisis is putting on the banking sector. Failure risk for these banks is closely linked to the sovereign risk profile given the funding, liquidity and solvency pressures they are facing. Loan quality has the potential to deteriorate further given the downside risks to the macroeconomic outlook and payment culture. While not our expectation, there is a risk of capital controls being introduced to curb deposit outflows from the domestic banks. This risk is reflected by Greece's Country Ceiling of 'B-', which is just a one-notch uplift over the IDR, which is low by eurozone comparison. It will be challenging to maintain a primary surplus this year as weaker domestic demand and tighter private sector liquidity will erode tax revenues. This would be the case even assuming an agreement with the official sector is forthcoming. Greece's external debt burden is heavy (net external debt stands at over 3x external receipts) but inexpensive to service due to its largely concessionary nature. The economy faces binding financing constraints as long as the political deadlock continues. Greece is running a current account surplus of 0.9% of GDP on the back of a substantial adjustment over the past five years. However, the export base remains narrow. Although below the eurozone average, income per capita and governance compares favourably with 'CCC' and 'B' range peers. These structural strengths are not drivers of the ratings at this point given the prevalence of near-term event risk. RATING SENSITIVITIES Developments that could, individually or collectively, result in a downgrade include: - Arrears to the IMF would not in and of themselves constitute a rating default. However, this outcome would still be credit negative. - A breakdown in negotiations between Greece and its creditors leading to alternative solutions being formally considered, for example a debt moratorium or restructuring of Greece's debt stock including bonds held by the private sector. - An exit from the eurozone, making the risk of a default on privately-held Greek bonds probable. Future developments that could, individually or collectively, result in an upgrade include: - Completion of the current programme review and an agreement on the terms of a follow-up arrangement between Greece and its official creditors. This would probably take the form, if not the name, of a third programme of policy-conditional financial support. - A track record of cooperation between Greece and its official creditors. - An economic recovery, further primary surpluses, and official sector debt relief (OSI) would put upward pressure on the ratings over the medium term. KEY ASSUMPTIONS The ratings are sensitive to a number of key assumptions: Greek banks make no further material demands on the sovereign balance sheet; 20% of GDP has been injected to date. If Greek banks incur losses that are not covered by private shareholders, this would lead to a cash call on the government as guaranteed tax credits are converted into equity. General government gross debt/GDP peaked at 178% in 2014 and remains constant in 2015, before gradually subsiding. These assumptions do not factor in any OSI on official loans that may be agreed over the medium term. The projections are sensitive to assumptions about growth, the GDP deflator, Greece's primary balance and the realisation of privatisation revenues. The EFSF would not exercise its right to declare the EUR29.7bn PSI sweetener loan to be due and payable in the event that Greece begins to run arrears on IMF repayments. Such a declaration would trigger a cross-default clause in the privately-held new bonds issued in 2012, which Fitch rates. Contact: Primary Analyst Douglas Renwick Senior Director +44 20 3530 1045 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Enam Ahmed Director +44 20 3530 1624 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Sovereign Rating Criteria' dated 12 August 2014 and 'Country Ceilings' dated 28 August 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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