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Greek sovereign debt rating to be upgraded by Fitch

By Nikos Chrysoloras

Greece’s credit rating will be increased one level by Fitch Ratings, which cited an improving economic and fiscal outlook for the country that sparked Europe’s sovereign debt crisis.

Greece’s long-term debt will be raised to B, five levels below investment grade, from B-, Fitch said in a draft report obtained by Bloomberg News. The upgrade may be announced tomorrow.

“Greece achieved a primary surplus in the general government account in 2013, a key target” with reference to the European Union-IMF financial assistance program and “an overperformance relative to budget,” the New York-based rating company said in the draft.

Greece holds European Parliament and a second round of local and regional elections on Sunday following the country’s first bond auction in four years. The nation, which set off Europe’s sovereign debt crisis in 2009 when it revealed its budget deficit had ballooned to over 15 percent of total economic output, is poised to return to growth after six consecutive years of contraction, Fitch said.

“The economy is bottoming out,” Fitch said. “Economic data outturns have been encouraging and support our baseline expectation that the recovery will gradually take hold this year.” Peter Fitzpatrick, a London-based spokesman for Fitch, declined to comment when contacted by telephone.

Political Instability

Four years and three prime ministers after Greece’s then Premier George Papandreou requested an international bailout in return for budget cuts and an economic overhaul that cost him his job, political instability still haunts Greece. If the leftist Syriza party wins the election on May 25, as opinion polls project, the blow may undo the coalition led by New Democracy and unravel the fragile progress toward stability.

“Political risk remains high,” according to the report. “An early general election in 1Q15 is the most likely scenario, although a snap election this year cannot be discounted.”

Greece, which asked private creditors to accept losses on their government bond holdings in the biggest debt restructuring in history, has been kept afloat since 2010 through a 240 billion-euro ($328 billion) lifeline from the euro area member states, the European Central Bank and the International Monetary Fund.

Fitch, which raised Greece to B- in May last year, will say in its report that “capital market conditions have improved significantly with large corporates and the sovereign able to re-access funding.”

Yields Fall

In almost half the instances, yields on government bonds fall when a rating action by Moody’s Investors Service, Fitch, and Standard & Poor’s suggested they should climb, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as the 1970s. When S&P downgraded the U.S. government in August 2011, bonds rose and pushed Treasury yields to record lows.

S&P and Moody’s rate Greece B- and B3, several steps below investment grade. S&P on March 21 maintained Greece’s credit rating unchanged, with a stable outlook, citing the country’s high debt load.

“To a large degree, Greece’s adjustment has taken place through steep declines in real GDP and employment,” Fitch said.

The rating company added that “there has also been a notable wage and price adjustment,” consumer prices are falling, and “despite mixed progress” in officially sanctioned structural reform, there have been “significant advances” in areas such as public administration and labor market flexibility.

[Bloomberg]

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