Standard and Poors has lowered the long-term sovereign credit rating on Greece to ‘CCC’ from ‘CCC+’ because of the absence of an agreement between Greece and its official creditors. S&P says that the Greek government will likely default on its commercial debt within the next 12 months.
“Greece delaying its payment to the International Monetary Fund (IMF) last Friday, June 5, appears to demonstrate that the Greek government is prioritizing pension and other domestic spending over its scheduled debt service obligations,” S&P said in a statement.
The outlook is negative. See below the detailed rating action and rationale as it was released by S&P.
Rating Action
On June 10, 2015, Standard & Poor’s Ratings Services lowered its long-term sovereign credit rating on the Hellenic Republic to ‘CCC’ from ‘CCC+’. The ‘C’short-term rating is unchanged, and the outlook is negative.
As defined in EU CRA Regulation 1060/2009 (EU CRA Regulation), the ratings on Greece are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see “Calendar Of 2015 EMEA Sovereign, Regional, And Local Government Rating Publication Dates: First-Quarter Update,” April 8, 2015). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In Greece’s case, the deviation was prompted by the decision of the central government to delay making a scheduled debt service payment to the IMF that was due on June 5, 2015.
Rationale
As its liquidity position continues to deteriorate, Greece appears to be prioritizing other spending items over debt servicing. In our view, without a turnaround in the trajectory of nominal GDP and deep public-sector reform, Greece’s debt is unsustainable. The downgrade reflects our view that in the absence of an agreement with its official creditors, Greece will likely default on its commercial debt within the next 12 months.
The European Central Bank (ECB) is currently providing financing to Greece’s banks and economy at a level exceeding 60% of GDP. Continuous withdrawals of deposits from Greek banks increase the possibility that the government could impose capital controls to staunch further deposit outflows and issue a parallel currency alongside the euro. The uncertainty around Greece’s relations with its creditors and its broader political stability is weighing on the economy; tax payment arrears rose materially in May, while the government appears to be conserving cash by delaying payments to suppliers. A weakening underlying fiscal position raises questions about the realism of any agreement with Greece’s creditors on fiscal targets, as projections for tax receipts and real and nominal GDP appear speculative. Even if an agreement with official creditors were to be reached over the next fortnight, we do not expect that such an agreement would cover Greece’s debt service requirements beyond September.
Outlook
The outlook is negative, given the risk of a further worsening of liquidity for the sovereign, its banks, and the economy. Our understanding is that the Greek government has decided to consolidate this month’s €1.6 billion in debt servicing owed to the IMF, an official creditor, into a single payment on June 30. If an agreement were reached between Greece and its official creditors over the next week, we would still expect this to involve a temporary three-month liquidity infusion. We do not consider it likely that there would be any official debt relief or more substantial financing agreed to in the next few days. In our view, this implies that confidence and investment activity will remain weak and growth prospects muted.
The negative outlook means that we could lower the rating again within a year if we perceive that the likelihood of a distressed exchange of Greece’s commercial debt will increase further. This could be the case if, for example, we took the view that further official creditor disbursements would remain elusive, resulting in the Greek government’s inability to honor all its financial obligations in full and in a timely manner.
The ratings could stabilize at the current level if we believe that a new financial support program will be agreed with policy conditions that satisfy both the political priorities in Greece and the creditor countries. Such a scenario could contribute to promoting political stability, tax compliance, and a gradual economic recovery.
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