ECONOMY

Fitch gives Greece an A for 2037 bond on deficit-cutting drive

LONDON – Fitch Ratings yesterday assigned Greece’s 4-billion-euro tap on its euro-denominated bond due September 2037 a long-term foreign currency rating of A. In assigning its rating to this bond, Fitch notes that the decline in the government deficit in 2005 to 4.3 percent of GDP, from 6.6 percent in the previous year, was welcome after the large-scale fiscal slippages and data revisions of recent years. However, the agency points out that continued disappointing tax performance and recent suggestions of a softening in ministerial resolve on the pace of further deficit reductions generate ongoing uncertainties about fiscal prospects. Greece’s sovereign ratings continue to be supported by consistently strong economic growth, high income per head and by an economy that is relatively high in added value. The tourist and shipping sectors are traditional strengths, while the financial sector is comparatively strong and poses minimal risk to macroeconomic stability or public finances. EMU membership also shields Greece from a potential balance of payments crisis and external shocks. Constraints Greece’s rating is constrained, however, by the state of its public finances, the weakest in the EU, and its public debt. At over 100 percent of GDP, it is the highest of any sovereign rated in the single A category. Also of continuing concern are the severe weaknesses in public accounts data, which have also undermined the credibility of its fiscal policy. «Greater control of public expenditures and a sustained attack on tax evasion is essential for restoring confidence in official Greek economic policy. Among other things, this requires the authorities to restore faith in official economic data. This was deeply undermined a year ago by Eurostat’s ‘restatement’ of government accounts stretching back to the late 1990s and the frequent upward revisions during 2005 of the previous year’s deficit,» said Chris Pryce, a director in the Fitch Ratings Sovereign Group. Fitch believes that the present government has recognized the severity of the many problems confronting the public sector and its finances and is committed to bringing the latter back under control, supporting our current stable outlook on the sovereign rating. The level of deficit reduction last year was a creditable performance. The target for the present year is a further sharp fall in the deficit to 2.6 percent of GDP. Fitch believes that in the light of recent fiscal history this is too ambitious an improvement for a single year but it could be achieved in 2007. The finance minister has also been quoted recently as saying that a further year in which to restore a Maastricht compliant deficit below 3 percent of GDP would be welcome. In the longer term, Greece faces severe challenges from its aging population, far sharper than that faced by other European countries. This is because its existing annual state pension payout, which is already one of the highest in Europe, will double in less than 50 years unless fundamentally reformed. Public and especially trade union opposition to such reform, however, is so strong that the government has already ruled out any action during the life of this Parliament.