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S&P Raises Outlook On Greece Ahead Of Bond Sale, Keeps B- Rating

Consider it a kiss to the bond investors who are expected to oversubscribe the upcoming latest “triumphal” Greek return to the bond markets, as soon as next week. Moments ago, rather unexpectedly, S&P raised its outlook on Greece from Stable to Positive, but reaffirmed the Greek rating at B-. The rating agency, said it believes that “recovering economic growth, alongside legislated fiscal reforms and further debt relief, should enable Greece to reduce its general government debt-to-GDP ratio and debt servicing costs through 2020.”

 We have therefore revised the outlook on Greece to positive from stable while affirming our ‘B-‘ long-term foreign and local currency sovereign credit ratings.

The positive outlook indicates our view that, over the next 12 months, there is at least a one-in-three probability that we could raise the ratings.

In other words, buy the Greek bonds, but beware a repeat of what happened in 2014, explains

Full S&P note below

On July 21, 2017, S&P Global Ratings revised the outlook on the Hellenic Republic (Greece) to positive from stable. We affirmed the ‘B-/B’ long- and short-term foreign and local currency sovereign credit ratings.


The outlook revision reflects our expectation that Greece’s general government debt and debt servicing costs will gradually decline, supported by economic recovery, legislated fiscal measures through 2020, and a commitment from Greece’s creditors, specifically from the Eurogroup, to further improve the sustainability of its sovereign debt burden.

The Eurogroup, in its statement on June 15, 2017, has agreed to facilitate market access for Greece through the creation of a cash buffer via disbursements over and above the amount needed for the Greek government to meet debt servicing obligations and pay down domestic arrears. In our opinion, this support is likely to pave the way for Greece to successfully reenter sovereign bond markets this year.

We also understand that the Eurogroup has reiterated its intention to provide Greece with further extensions on loans from the European Financial Stability Facility, as well as deferrals on debt service at the conclusion of the European Stability Mechanism (ESM) program in August of next year. These loans, contracted during Greece’s second program, constitute the largest chunk of Greek government debt. Such additional measures, once put into effect, will further lengthen Greece’s debt maturity profile–from more than 18 years presently–and reduce its annual gross financing needs. The amortization of Greek debt will peak in 2019 at about €13.5 billion, an estimated 7% of GDP; however, we expect the government to issue market debt to smooth upcoming redemptions, including the 2019 maturities. In every other year from 2018 until 2023, we estimate that repayment obligations will be less than 4% of GDP.

There are as yet no specifics on the precise form of further financial assistance to Greece, if any, after the current ESM program is concluded next year. However, given the considerable financial assistance and political capital invested in Greece by its European creditors since the start of the crisis, we believe that support–in the form of technical assistance and further measures toward long-term debt relief–is likely to remain strong in the years to come, albeit tied to conditionality.

Moreover, we consider it to be significant that euro-area governments are in broad agreement on the outlines of a plan to link debt relief for Greece to any divergence of actual nominal GDP growth from growth assumptions in the ESM program’s debt sustainability analysis.

We note that the implementation of this plan, once finalized, is conditional on Greece’s compliance with its ongoing loan program. While Greece is expected to exit the current program in 2018, its policymakers have legislated measures until 2020, including cuts to pensions and the income tax allowance, as well as structural reforms, such as changes to facilitate out-of-court debt workouts. This allowed Greece’s creditors to conclude the second review of the current ESM program and to sanction a disbursement of €8.5 billion (about 4% of GDP).

We believe that implementation challenges of further fiscal measures and other potentially unpopular reforms–such as those related to the product and labor markets, public administration, and privatization–remain significant. Most of Greece’s tax burden falls upon a subsection of the private sector under pressure from difficult credit conditions, an unpredictable business environment, and a challenging macroeconomic setting. Tax evasion remains widespread. Progress on privatizing state assets has been limited in comparison to the long-term privatization target of €50 billion (about 30% of GDP). Finally, the liquidity positions of key government-related entities, including electric utility the Public Power Corporation, remain precarious due to payment arrears in the public and private sector.

Even so, we anticipate broad compliance with the current program’s targets until it ends in August next year. The recovering economy, boosted by July’s ESM disbursement of €0.8 billion (0.4% of GDP) for arrears clearance, will help authorities meet most of the fiscal conditionality, as indirect tax receipts (particularly VAT) should perform well. Incentives for the government to comply with the program remain considerable. The European Central Bank (ECB), which lends to Greece subject to program compliance, will continue to be a critical source of funding for Greece’s banks until deposits return to the Greek financial system. The future return of deposits into the domestic financial system will, in turn, depend upon policy stability and further economic recovery. We therefore think Greece is likely to comply with the program’s stipulations–albeit with delays–because the reversal of previously legislated reforms could render ineligible the pool of Greek government bonds that Greek banks use as collateral to access liquidity from the ECB. Another reason is that the prospect of additional debt relief, which also lowers the government’s gross financing needs, could further encourage Greece to stay the course.

Accordingly, we project that over 2017-2020 Greece will report general government primary surpluses of about 3% of GDP annually on average, alongside average nominal GDP growth of 2.8%, which should allow general government debt to decline to 158% of GDP in 2020 from 179% in 2016. Our debt-to-GDP projections are highly contingent on an acceleration of real and nominal GDP, though we do note that recent fiscal performance has been encouraging. Moreover, we do not exclude the possibility of a more flexible approach from Greece’s creditors toward its compliance with the highly ambitious and potentially self-defeating medium-term primary surplus target of 3.5% of GDP. In 2016, the general government primary surplus was 3.9% of GDP, well above the program’s target of 0.5%. While much of the fiscal outperformance during the year came from expenditure restraint, which weighed on growth, some of the adjustment was also on the revenue side. General government revenues increased by 3%, reflecting higher revenues from indirect taxes and higher personal income taxes.

The Greek banking system remains impaired, though we do not view as imminent the risk of another round of recapitalization by the sovereign. Nonperforming exposures (NPEs) still constitute nearly half of systemwide loans. Initiatives to tackle the high stock of NPEs are underway, including for instance legislation to facilitate out-of-court restructuring, the development of a secondary market, and electronic auctions.

The ratings are constrained by Greece’s high general government debt, which translates into the second highest debt-to-GDP ratio of all the sovereigns we rate; low economic growth rates that have eroded income levels over the past decade and caused price and wage trends to diverge markedly from the rest of the euro area; the highest unemployment rate in the euro area; and considerable structural challenges, such as adverse demographics, large social security deficits, and an impaired banking system that challenges the transmission of the ECB’s monetary policy into Greece. The ratings are supported by the low cost of servicing much of Greece’s general government debt burden; primary surpluses, which if sustained could gradually lower Greece’s debt relative to GDP; ongoing support from creditors in the form of very long-dated concessional loans; and a new commitment to facilitate market access via the creation of liquidity buffers and further debt relief.

We project that the ratio of net general government debt to GDP will continue declining, after reaching 170% in 2016, but will not be below 150% of GDP until 2021. Greece’s net general government debt remains the second highest of the 130 sovereigns we rate. However, the cost of new loans for Greece, under the current program, is significantly lower than the average cost of refinancing for the majority of sovereigns rated in the ‘B’ category. We anticipate that even with the Greek sovereign’s reentry into commercial bond markets, the proportion of commercial debt will remain less than 15% of total general government debt through to the end of 2020. We therefore expect a gradual reduction in interest costs relative to government revenues. The average remaining term of Greece’s debt is an estimated 18 years, which is one of the longest among rated sovereigns. For this reason, Greece’s official creditors as well as the International Monetary Fund have benchmarked the ratio of Greece’s annual general government gross financing needs to GDP as a metric for debt sustainability, alongside the debt-to-GDP ratio.


The positive outlook indicates our view that, over the next 12 months, there is at least a one out of three probability that we could raise our ‘B-‘ ratings on Greece.

We could consider an upgrade if commitments from the Eurogroup to provide further debt relief were approved, allowing for a further reduction in the costs of sovereign debt servicing and a further terming out of the government debt profile. Rating upside could also stem from a period of stable economic growth and a recovery of the labor market. We could also consider an upgrade if the banking sector further reduces its reliance on official funding, reflecting a gradual return of confidence and deposits to the system or access to market financing.

We could revise the outlook back to stable if legislated reforms, critical to ongoing creditor support, are reversed, endangering further debt relief measures; or if growth outcomes are significantly weaker than our expectations, thereby restricting Greece’s ability to continue fiscal consolidation and debt reduction.

source: zerohedge


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