S&P sees dire fiscal situation from Greece’s adverse demographics

Without concerted policy and fiscal reforms, the aging of the Greek population will lead to intense pressure on public finances and ratings on the sovereign, Standard & Poor’s Ratings Services said in a report published yesterday. The report, titled «Global Graying Country Report: Hellenic Republic (Greece),» provides country-specific analysis on Greece (A/Stable/A-1) designed to complement the overall report covering 32 sovereigns, published earlier (see commentary article «Global Graying: Aging Societies And Sovereign Ratings,» published on RatingsDirect, Standard & Poor’s Web-based credit analysis system, on May 31, 2006). «Absent further reforms, total age-related public expenditures in Greece will rise to 32.4 percent of GDP in 2050, up from 18.9 percent in 2005,» said Standard & Poor’s credit analyst Trevor Cullinan. «Without any measures on the fiscal or structural policy front, general government deficits and net debt would rise sharply from the 2020s to reach 35 percent and 450 percent of GDP, respectively, by 2050.» A fiscal deterioration of that magnitude would not be compatible with the current «A» long-term sovereign rating on Greece. After an initial rise to the «AA» level after 2010, as a result of an improved cyclical balance in those years due to reduced interest expenditures, the rating would come under increasing pressure. It would soon fall back into the «A» category after 2015, and would then drop further into the «BBB» category by 2020. In 2025, Greece’s fiscal indicators would have weakened to the extent that they would be more typical of performances currently associated with speculative-grade sovereigns. This scenario is not a prediction by Standard & Poor’s. It is a simulation that highlights the importance of age-related spending trends as a factor in the evolution of sovereign creditworthiness. In reality, it is highly unlikely that governments will allow debt and deficit burdens to spiral out of control. Once governments are confronted with unsustainably rising debt burdens they do react, however reluctantly, by tightening the fiscal stance and/or reforming expenditure programs. The scenario analysis gives some valuable insights about the power of policy choices. If Greece were to embark on radical structural reform preventing age-related spending from rising, fiscal indicators would hold up much better. Following such a concentrated policy approach, the net debt ratio in Greece would only be about 30 percent of the ratio under the no-policy-change base case. The theoretical sovereign rating would not fall below the «A» category before 2040. (Reuters)