RPT-UPDATE 1-Moody's raises Greek rating to Caa1, citing improved fiscal position

Fri Aug 1, 2014 5:41pm EDT

(Repeating to additional subscribers)

* Moody's upgrades Greece by two notches

* Cites improved economic outlook, fiscal position

* Rating still in junk territory

By Karolina Tagaris

ATHENS, Aug 1 (Reuters) - Moody's raised Greece's sovereign credit rating on Friday and gave it a stable outlook, saying it believed the government's fiscal position had improved significantly.

The positive comments boost expectations that Greece's government may tap bond markets again this year after two sales in April and July following a four-year exclusion since it was bailed out by the European Union and the International Monetary Fund.

"The first factor behind the upgrade of Greece's rating is Moody's strengthened expectation that the general government debt to GDP ratio will start declining in 2015," Moody's said.

"The government's progress in fiscal consolidation under its economic adjustment program underscores the improvement in the debt trajectory," it said in a statement raising its rating by two notches from 'Caa3' to 'Caa1'.

Fitch assigns Greece a B credit rating, while S&P rates it B-/B. All three credit ratings are still in junk territory, reflecting a high debt level of about 175 percent of the country's gross domestic product.

Moody's expects Greece's debt to GDP ratio to decline in 2015 after peaking this year at around 179 percent of GDP. The ratings agency said Greece's short-term debt rating is unaffected and remains "Not Prime."

Greece, which has been bailed out twice by the EU and the IMF with nearly 240 billion euros ($320 million) in rescue loans, is expected to begin negotiating further debt relief in the fall.

In September, it will undergo the latest checkup by inspectors from its foreign lenders on whether it is meeting the commitments attached to its bailout before further aid is disbursed.

Moody's said Greece's structural reform drive had "mixed results" to date, but praised the government's efforts on labor market reforms and in liberalizing some areas of the product markets.

"These reforms have led to wage and price adjustments, which far outstrip adjustments elsewhere in the euro area periphery," it said.

Greece has enjoyed a turnaround in investor sentiment in recent months as it begins to emerge from a protracted recession.

After nearly crashing out of the euro zone in 2012, the country expects to return to economic growth this year following a six-year depression that has shrunk its economy by a quarter.

In April, it raised 3 billion euros after attracting offers of about 20 billion euros. That was followed by a second sale in July, when it raised 1.5 billion euros with the sale of a three-year bond, though less than the 2.5 billion to 3 billion euros expected.

Still, Moody's warned that a "continuing, high level of political uncertainty" in the country constrained its rating at the Caa level and did not rule out early elections in the first quarter of 2015.

"The prospect of early elections, the result of which are highly uncertain, increases the risk of delays in policy implementation at a critical juncture of the economic adjustment program," Moody's said. (1 Euro = $1.3429) (Editing by Jonathan Oatis)

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