Fitch keeps Greece at A rating

Fitch Ratings yesterday affirmed Greece’s foreign and local currency Issuer Default Ratings (IDR) at A with Positive Outlook and the Short-Term Foreign Currency IDR at F. The Country Ceiling was affirmed at AAA, reflecting Greek membership of the European Monetary Union. «The factors underpinning the positive outlook remain in place but more progress is needed on the public finances to translate this into an upgrade,» said Chris Pryce, director in Fitch’s Sovereign Group. The positive outlook reflects sustained and strong GDP growth, which is approximately double the euro area average in the last 10 years and is moving income per head toward EU-15 levels. The economy is focused on services, especially shipping and tourism, and Greek business has successfully taken advantage of the rapid growth in Southern Europe and the Balkans as well as the expansion of world trade. The banking system remains relatively strong with a Fitch BSI (Banking System Indicator) of B (high quality). This is significantly better than the majority of its rated peers and in line with most developed countries and despite continuing rapid credit expansion. Public debt ratio lower In addition, the public debt ratio, one of the highest in Europe, has now established a downward path both because of the high nominal GDP growth and, more recently, fiscal consolidation. The government deficit declined to a Maastricht-compliant 2.6 percent of GDP (on revised data) in 2006 from 7.4 percent in 2004 and remained below the Maastricht threshold at 2.8 percent in 2007. Following recent upward revisions to GDP data the latest government debt-to-GDP ratio at end-2007 was 94.5 percent, compared with the then estimate of 104.1 percent at end-2006. However, Fitch notes that further progress needs to be demonstrated if Greece is to achieve a rating upgrade. Firstly, while the fiscal deficit remained below 3 percent of GDP last year, it was 0.4 percent of GDP larger than expected despite GDP growth being broadly in line with expectations. This was due to a number of special factors, including emergency assistance following a natural disaster, the unexpected additional debt repayment to Olympic Airways ordered by the courts and unbudgeted payments to the EU related to the GDP revision. However, it is important that the government demonstrates its ability to achieve its own target of a 1.6 percent deficit this year to maintain credibility in the continuity of the fiscal consolidation program. Almost all of this year’s improvement is scheduled to come from an increase in tax revenue, adding 1.3 percent worth of GDP to total revenue, mostly via indirect taxation, a broadening of the property tax base and further efforts to reduce tax evasion. This will be a difficult task but, if achieved, will return Greece to a plausible path to achieving balance in the public finances by 2010 and knock 10 or more points off the debt ratio over the same period. Secondly, the external environment has become more challenging. The expansion of Greek companies into new markets in the Balkans has been positive for growth but brings with it macroeconomic risks when these markets are, as at present, under pressure from tighter credit conditions and large external financing requirements. And while the continued widening in the Greek current account deficit is not a direct credit concern for a euro area member it could be signaling unsustainable trends in the economy in the context of robust domestic credit growth. Competitiveness has deteriorated as wages have risen relative to productivity growth and labor market inflexibility could hamper the economy’s ability to cope with negative global shocks. Nevertheless, it is noteworthy that Greek exporters have been successful in the services sector and have more or less held their market share in goods and services over the past five years, in contrast to some other Southern European economies. GDP revision Thirdly, the improvement in fiscal ratios that Fitch had expected as a result of GDP revisions was in the event smaller than anticipated as Eurostat did not accept the proposal of National Greek Statistics Service to increase GDP by about 25 percent, instead approving an increase of 9.6 percent in the base year. Fitch had anticipated last year that the switch to new national accounts measures would cut government debt to around 80 percent of GDP for end-2006 from the then estimate of 104 percent. Finally, Fitch would like to see more action taken on pension reform. Population aging poses a high risk to government finances and there is only limited time left to start initiating parametric reforms designed explicitly to reduce the untenable generosity of state provision. The changes that the government has announced are primarily administrative in nature and will not materially reduce the fiscal costs of aging. Nevertheless, it important that these changes are implemented thoroughly so that more fundamental changes may be introduced when the need to move the country’s long-term finances to a sustainable position is finally recognized.