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Fitch Downgrades Greece to 'CCC' from 'B'

Fitch Ratings has downgraded Greece’s long-term foreign- and local currency Issuer Default Ratings (IDRs) to ‘CCC’ from ‘B’. The issue ratings on Greece’s senior unsecured foreign and local currency bonds are also downgraded to ‘CCC’ from ‘B’. The Short-term foreign currency IDR has been downgraded to ‘C’ from ‘B. The Country Ceiling has been revised to ‘B-‘ from ‘BB’.
Here’s the full review by the rating agency:
The downgrade reflects the following key rating drivers and their relative weights:-
Lack of market access, uncertain prospects of timely disbursement from official institutions, and tight liquidity conditions in the domestic banking sector have put extreme pressure on Greek government funding. We expect that the government will survive the current liquidity squeeze without running arrears on debt obligations, but the heightened risks have led us to downgrade the ratings.
The damage to investor, consumer, and depositor confidence has almost certainly derailed Greece’s incipient economic recovery. The damage will take time to repair even if prospects for a successful programme completion improve over the coming days or weeks. We have revised down our growth forecast significantly to 0.5% this year from 1.5% in January 2015 and 2.5% in December 2014, with risks to growth on the downside. Liquidity conditions faced by firms will have worsened substantially, in our view, due to increased government arrears to suppliers and bank funding strains.
The agreement reached in February to extend the EFSF programme to end-June after several weeks of brinkmanship supports our base case scenario that Greece and its creditors will ultimately reach a compromise deal. However, progress since then has been slow. It is unclear when the earliest disbursement could take place and what will be required for this to happen.
In the coming days, Greece has been asked to submit a more detailed list of reforms to the Eurogroup. If this is accepted, it would bring the government closer to a partial disbursement before fully completing the programme review. However, in our view, it is likely that the Eurogroup will want the Greek government to demonstrate they have implemented some part of this list before funds are disbursed. This pushes back the probable disbursement date well into April at the earliest.
Greece faces repayments to the IMF of EUR450m in April, EUR750m in May and EUR1.5bn in June. Debt repayments in July and August rise to EUR4.0bn and EUR3.2bn, respectively, primarily due to bonds held by the Eurosystem falling due. We expect the government to continue to run arrears to suppliers to offset weaker-than-budgeted cash revenues and provide room for debt service.
Large-scale deposit outflows from Greek banks (we estimate a 15% decline in the deposit base since end-November) have added to pressures on the Greek economy. Fitch’s Banking System Indicator for Greece is ‘b’, indicating weak standalone creditworthiness. The ‘b’ Viability Ratings of the four main domestic banks are currently on Rating Watch Negative due to heightened funding and liquidity risks. The banks are adequately capitalised but their asset quality is weak and may deteriorate further this year.
While not our expectation, there is risk of capital controls being introduced to curb deposit outflows from the domestic banks. This risk has led us to revise down our Country Ceiling to ‘B-‘.
Greece’s ‘CCC’ IDRs also reflect the following key rating drivers:-
The state budget delivered a primary surplus (programme definition) of 0.3% of GDP in 2014, the second year of surplus. This is below the programme target of 1.5% due to the non-payment by the Eurosystem of the rebate on SMP holdings of debt and weaker revenues. Even assuming an agreement with the official sector is forthcoming, it will be challenging to maintain a primary surplus this year as weaker domestic demand and tighter private sector liquidity will erode tax revenues.
Greece’s external debt burden is heavy but inexpensive to service due to its largely concessionary nature. Greece is running a current account surplus of 1% of GDP, aided by reduced imports, buoyant tourism receipts in 2014 and a significant step-up in net EU transfers. The economy has adjusted substantially over the past five years through nominal price and wage declines, although the export base remains narrow.
Although below the eurozone average, income per capita and governance compares favourably with ‘CCC’ and ‘B’ range peers. However, these structural strengths are not drivers of the ratings at this point given the prevalence of near-term event risk.
Developments that could, individually or collectively, result in a further downgrade include:
-A break-down in negotiations between Greece and its creditors leading to alternative solutions being formally considered, for example a debt moratorium or restructuring of Greece’s debt stock including bonds held by the private sector
-Arrears to the IMF would not in and of themselves constitute a rating default. However, it would nonetheless be credit-negative and could lead to a further downgrade.
-An exit from the eurozone, making the risk of a default event on privately held Greek bonds probable
Future developments that could, individually or collectively, result in an upgrade include:
-An agreement between Greece and its official creditors unlocking delayed programme disbursements and a further agreement on the terms of a follow-up arrangement. This would probably take the form, if not the title, of a third programme of policy-conditional financial support
-An acceleration of Greece’s economic recovery, further primary surpluses, and official sector debt relief (OSI) would put upward pressure on the ratings over the medium term
The ratings and Outlook are sensitive to a number of key assumptions:
Greek banks make no further material demands on the sovereign balance sheet; 20% of GDP has been injected to date. If Greek banks incur losses that are not covered by private shareholders, this would lead to a cash call on the government as guaranteed tax credits are converted into equity.
General government gross debt/GDP peaked at 178% in 2014 and remains constant in 2015, before gradually subsiding. These assumptions do not factor in any OSI on official loans that may be agreed over the medium term. The projections are sensitive to assumptions about growth, the GDP deflator, Greece’s primary balance and the realisation of privatisation revenues.
The EFSF would not exercise its right to declare the EUR29.7bn PSI sweetener loan to be due and payable in the event that Greece begins to run arrears on IMF repayments. Such a declaration would trigger a cross-default clause in the privately-held new bonds issued in 2012, which Fitch rates.

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