Threat of credit rating downgrade

Credit rating agency Fitch announced yesterday that Greece’s rating could be revised downward, citing recent shock revisions to its budget deficit and debt data. Economists said the move, two weeks after a downward outlook revision by Standard & Poor’s, could jack up Greece’s borrowing costs and hinder efforts to get the budget and public debt into line with European Union rules. Earlier this month, S&P revised Greece’s sovereign ratings outlook to negative from stable because of a lack of progress in lowering public debt. Fitch put Greece’s long-term foreign and local currency ratings of A+ on «rating watch negative.» «(There are) strong indications that the fiscal position has deteriorated further in 2004,» Fitch said. It added that a review of the ratings is expected to be completed in November and will focus on the outlook for public finances, including this year’s likely result and the 2005 budget. Extra expenditure for the Athens Olympics is expected to raise the budget deficit to 5.3 percent of the country’s gross domestic product (GDP) from a revised 4.6 percent last year. «The threat of a downgrade is there, it’s not just Fitch, it’s also Standard and Poor’s,» said financial strategist Jose Garcia Zarate at 4cast. «The Fitch move means Greece has to come up with very serious fiscal reform measures. Unless Greece is serious in cutting expenditure and reforming its tax system, it’s going to be difficult to achieve its target of a 2.8 percent deficit in 2005,» he added. Fitch said that while data revisions are common across all countries rated by the agency, the scale of the Greek adjustments were a concern, not least because they come on top of previous revisions considered, in their time, to be final ones. «These figures show that fiscal consolidation is far less advanced than previously believed,» Chris Pryce, director of sovereign ratings at Fitch said, in a damning verdict of the previous government’s efforts, or lack thereof, to improve public finances. «General government debt was actually 110 percent of GDP at the end of 2003, seven percentage points higher than was previously estimated, and recent trends are not encouraging,» he added. Fitch added that a credible 2005 budget and progress with structural reform, including privatization, will be essential if Greece is to maintain, or even improve, its credit rating. «However, Greece’s track record is mixed and the most important measures, such as labor market and pension reforms, are likely to be the most politically difficult to push forward,» the ratings agency said. While the deterioration in public finances this year largely reflects extra spending on the Olympics, it is also the result of an inability to control primary expenditure, something very disappointing given that Greece had the highest growth rate of all eurozone member states. An Athens-based economist who wished not to be named said there is now more pressure on the Greek government to promote prudent fiscal conditions. Doubts about the quality of EU budget data and the credibility of the Stability Pact have spread like wildfire across the bloc since the latest Eurostat revision, with politicians calling for stricter budgetary controls and Greece’s punishment. (Combined reports)

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