S&P expects recession to spill into 2014 too

Standard & Poor’s stated on Friday that it would retain Greece’s credit rating at B-, but forecast that the economy would continue to contract for a seventh consecutive year in 2014, by 1 percent, while unemployment would break yet another record, climbing to 28.5 percent next year.

The international rating agency reiterated its previous assessment on the prospects of the Greek economy, even though it praised both the considerable improvement in the country’s fundamentals and the declared support of the eurozone. The high level of the debt and the risk of political and social instability are the most important factors that render S&P economists more reserved regarding the Greek economy.

The agency’s report argues that the Greek economy has reached a balance, when one takes into account the reduced current account deficit, the budget adjustment and the country’s improved competitiveness. The S&P analysts are convinced that Greece’s European partners are determined to keep it within the eurozone. On the other hand, the general government debt and the external debt of the economy remain huge, to say nothing of the economic and political challenges.

Notably the agency is concerned about the social impact of the prolonged recession: “Downward pressures on nominal salaries will take unemployment higher to 28.5 percent in 2014, a forecast that partly depends on when the dismissals from the public sector are implemented. Since 2010 nominal salaries in the private sector have been reduced in Greece more than in any other European country, including the Baltic states, which in our view undermines social stability.”

S&P further notes that the B- long-term rating for Greece reflects in its view the uncertain prospects for economic growth, the high – albeit with long-term repayment dates – state debt and the significant external debt position. At the same time the S&P assessment relies on the comparatively high (although still diminishing) per capita gross domestic product, the important restructuring and fiscal reforms, and the major credit lines provided under a number of conditions by the eurozone and the International Monetary Fund.

Standard & Poor’s estimates the recession will continue into 2014, with a 1 percent contraction, compared to 4 percent for this year. Its GDP contraction forecast for 2014 contrasts with the expectation of the government and its creditors, which anticipate a return to growth next year. The international agency believes the recession will continue “as disposable income decreases due to the further reduction in employment, the decline of salaries, the tax hikes and the serious reduction of the budget amid a credit crunch. We expect investments to continue to drop as domestic lenders withhold funding, while enterprises proceed to deleveraging.”

S&P also notes that reforms in public administration, healthcare and public revenues have not been completed yet, and that the privatization process is slow. However it adds that if the government achieves a primary surplus this year, “then it could trigger a further relaxing of the official creditors’ loan terms.” That could help Athens toward the reduction or even the wiping out of the funding gap that has been acknowledged for the 2015-16 period, S&P concludes.

Meanwhile the general director of the European Stability Mechanism (ESM), Klaus Regling, told German newspaper Handelsblatt on Friday that Greece will need a third bailout package.

He explained that it is rather clear that Greece will not be ready next year to refinance its debt requirements on the open market.