TEXT-S&P revises Greece's outlook to negative

Overview

-- Following delays in implementing budgetary consolidation measures and a worsening Greek economy, we believe Greece is likely to require additional financing for 2012 under the EU/International Monetary Fund (IMF) program (EU/IMF Program).

-- We consider the Greek government will find it difficult to make further cuts to meet the conditions to secure the next disbursement of the next tranche of funding from the EU/IMF Program.

-- We are revising the outlook on the long-term ratings on Greece to negative, reflecting the possibility of a downgrade if Greece fails to secure the next disbursement of the EU/IMF Program.

-- We are affirming the 'CCC/C' foreign and local currency credit ratings on Greece. Rating Action On Aug. 7, 2012, Standard & Poor's Ratings Services revised the outlook on the long-term sovereign credit rating on the Hellenic Republic (Greece) to negative from stable. At the same time, we affirmed the 'CCC/C' long- and short-term foreign and local currency sovereign credit ratings. Rationale The negative outlook reflects the potential for a downgrade if shortfalls in Greece's 2012 deficit and arrears targets established under the current EU/International Monetary Fund (IMF) program (EU/IMF Program) are not met by new funding or other relief from members of the Troika (the EU, European Central Bank, and IMF). We see the likelihood of shortfalls, owing to election-related delays in the implementation of budgetary consolidation measures for the current year, as well as the worsening trajectory of the Greek economy. We project GDP will contract by 10%-11% cumulatively during 2012-2013, versus the negative 4%-5% assumed by the EU/IMF Program for 2012-2013. In our opinion, the deepening contraction in Greek GDP beyond the EU/IMF Program's assumptions and the related worsening of the fiscal position imply a high likelihood that Greece will require additional financing of as much as EUR7 billion (3.7% of GDP) for 2012. This takes into account a fiscal deviation of at least EUR3 billion (1.5% of GDP) and IMF year-end arrears targets, which imply the need to pay arrears down by about EUR4 billion or 2% of GDP. Our estimate of additional financing needs could, however, be reduced if arrears or deficit targets are relaxed. In the first quarter of 2012, Greek real GDP contracted by 6.5% year on year, with domestic demand collapsing by nearly 11% over the same period. Assuming a contraction of 7% during 2012, Greek GDP is likely to be 21% below its 2007 peak by year-end in volume terms, reflecting five consecutive years of economic depression, during which unemployment has soared from 7.9% to 22.5%. As a result of this economic weakness, and due to an absence of progress on tax administration reforms, collection of personal, corporate, and indirect taxes is well below target for 2012. The severe liquidity squeeze in the Greek economy is visible in rising public sector arrears and negative credit and deposit growth. At present, we understand that public sector arrears amount to approximately EUR6 billion-EUR7 billion, or an estimated 3.0%-3.5% of GDP as the central government and public companies continue to delay payment to suppliers. We note that under the EU/IMF Program the government is committed to reducing arrears by EUR4 billion or just over 2.0% of GDP during the second half of this year. We view the reduction of arrears as vital to normalize the payments system and regularize economic activity within the confines of Greece's membership in the Economic and Monetary Union (EMU or eurozone). The squeeze on liquidity in the private sector is visible in the continuous contraction of the stock of bank loans and deposits. Eurosystem data indicates that during June alone Greek resident deposits declined by more than 4% month on month. This was likely due to capital flight, partially related to uncertainties ahead of the June 17 elections, and the need to draw down on savings to meet current expenses. This implies that deposits have declined by 10.3% during the first half of 2012, and by 36% since the end of 2009. Despite positive base effects, the annual pace of the contraction in credit to Greek residents is accelerating and has touched 5% in June. Over the past two years, the total stock of lending to Greek residents has contracted by 12% of GDP. Without credit returning to the real economy, the perspective for a recovery in economic activity, employment, and fiscal consolidation continues to be gloomy. To convince the EU and IMF to disburse the next critically important loan tranche in the autumn, we expect that the Greek government will need to implement the overdue conditionality it has committed to under the EU/IMF program. This will mean moving ahead with a mixture of further public sector salary cuts, headcount reductions, pension adjustments, as well as most probably the elimination of energy subsidies. On the revenue side, the Troika is likely to require more measurable progress on reorganizing the tax administration, as well as on collection of the special property tax. We continue to see major impediments to the full implementation of these measures, many of which are institutional in nature. Moreover, the fiscal adjustments, if implemented, will in our view prolong the contraction of the economy, leading to a further loss of popular support for future fiscal and structural reforms and hence weakening the new government's already tentative mandate. It is our understanding that under the current debt-servicing schedule, the Greek government is due to make a EUR3.1 billion principal payment on Aug. 20, 2012, to the Eurosystem. Our expectation is that part of this payment can be funded by tapping local treasury bill markets. In addition, the government has access to other reserves. An estimated EUR3 billion in cash remains in the Hellenic Financial Stability Fund, while the state-owned Deposit and Loans Fund holds approximately EUR1 billion-EUR2 billion in Green Funds dedicated to environmental projects. Under Standard & Poor's sovereign criteria, nonpayment on these obligations would not constitute a default, as the Eurosystem is not a commercial creditor. Without more substantial debt relief, we continue to project that Greek net general government debt to GDP will exceed 170% of GDP by year-end 2013, which, despite low average interest costs, continues to represent well over 4x government revenues. This is among the highest of all rated sovereigns. With nominal GDP set to decline further as the economy deflates to more competitive real exchange rate levels, this debt burden appears to us to be unsustainably high. Outlook The negative outlook reflects the potential for a downgrade if deviations from Greece's 2012 deficit and arrears targets are not met by new funding or other relief from the Troika. A failure to secure the next disbursement under the EU/IMF Program or to secure other relief from members of the Troika would imply an interruption in funding to the Greek government and, via the Eurosystem, to the Greek banks that in our view would increase the probability of a domestic payments crisis, potentially pushing Greece out of the Eurosystem. We believe that such a scenario would lead to a renewed sovereign default on Greece's remaining commercial debt. Related Criteria And Research

-- Sovereign Government Rating Methodology And Assumptions, June 30, 2011

-- Introduction Of Sovereign Recovery Ratings, June 14, 2007 Ratings List Ratings Affirmed; CreditWatch/Outlook Action

To From Greece (Hellenic Republic) Sovereign Credit Rating CCC/Negative/C CCC/Stable/C Ratings Affirmed Transfer & Convertibility Assessment AAA Senior Unsecured CCC Recovery Rating 4 Commercial Paper C Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.