“In Fitch’s opinion, the package minimises near term liquidity risk for Greece, obviates the need for the sovereign to tap international capital markets until 2012 and offers the government a path to fiscal solvency, provided that the program is implemented fully and effectively,’ says Paul Rawkins, a Senior Director in Fitch’s Sovereign ratings team.
“However, whilst the support package maps out a viable route to medium-term debt sustainability, general government debt is set to rise to almost 150% of GDP before stabilising in 2013, making this route a highly challenging one,” added Rawkins.
Fitch currently rates Greece at ‘BBB-’ with a Negative Outlook, following successive sovereign downgrades from ‘A’ since October 2009. The agency notes that the engagement of the IMF has enhanced the credibility of the Greek fiscal adjustment program, while the accompanying financial support package greatly reduces near term financing risks. Henceforward, with the policy agenda being set by the IMF-EU, Fitch’s focus will shift to the underlying performance of the economy and the Greek authorities’ ability to sustain multi-year retrenchment in the face of deep seated domestic opposition.
The downside risks are high and Fitch has accordingly judged that Negative Outlooks on Greece’s sovereign ratings remain appropriate.
The success of the programme hangs not only on the authorities’ ability to meet the fiscal targets, but also the capacity of the economy to adjust and recover, which remains highly uncertain. The macroeconomic assumptions underlying the IMF programme appear broadly realistic, while the private sector may yet prove to be more flexible than many expect, particularly in the context of broader European economic recovery. Nonetheless, Fitch says that the magnitude of the paradigm shift away from the public sector should not be underestimated.
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