Nov 27 - The announcement of an agreement aimed at securing Greek debt
sustainability and allowing the next disbursement of financial aid eases the
immediate threat of a Greek sovereign default or eurozone exit, Fitch Ratings
says. This is positive for Greece and for other eurozone sovereigns. The deal
could help put Greece's sovereign debt on a sustainable footing, although key
questions remain to be answered, and implementation risk is high.
Phased debt service relief measures - notably further cuts in interest rates on
the Greek Loan Facility of 100bp and a 10-year deferral of interest payments by
Greece on European Financial Stability Facility (EFSF) loans - and the
remittance of European Central Bank profits on the Securities Markets Programme
portfolio, combined with a possible debt buyback, should help to close fiscal
financing gaps and put Greece's debt/GDP ratio back on track. We estimate that
debt service relief, ECB remittances, and an allocation of EUR10bn to buy back
bonds from private sector creditors at approximately 35 cents in the euro, could
see debt/GDP peak at around 179% in 2014, before declining to 124% in 2020,
broadly in line with the eurogroup's own projections.
We would not treat a debt buy-back as a credit event provided it was wholly
voluntary and had no adverse implications for non-participants.
Our projections assume that the agreement restores annual economic growth to
3%-3.5% towards the end of the decade, and that Greece maintains a primary
surplus of 4.5% of GDP from 2016. The net impact of a bond buy-back would also
depend on whether the eurogroup extended new debt to Greece to fund the
transaction, as well as on the level of investor participation.
Tuesday's agreement recognises the huge political capital expended in securing
Greek parliamentary approval for additional austerity measures, and confirms
that the eurogroup is still thinking of solutions to the Greek crisis that will
keep the country in the eurozone. If the next EFSF disbursement of EUR43.7bn
(EUR10.6bn for budgetary financing and EUR23.8bn in EFSF bonds earmarked for
bank recapitalisation in December and the remainder in the first quarter of next
year) takes place as envisaged, it will provide much needed liquidity to cover
deficits, pay down arrears, and continue to recapitalise Greek banks.
The December disbursement requires approval by eurozone national parliaments and
a review of the possible buy-back, while Greece must meet agreed milestones
(including implementation of tax reform by January) to be agreed by the Troika,
to receive the Q113 payments. Questions remain on how the bank recapitalisation
will be implemented and whether the capital injection will be sufficient to
ensure the banks' long-term viability. For example, a sovereign debt buy-back
could result in further losses for Greek banks, while further asset quality
deterioration, and the Bank of Greece's 10% core capital ratio requirement by
end-June 2013 will also increase the banks' capital needs.
We will comment further on the implications for Greek banks in the near future.
So implementation risk, which has been a problem with all the Greek programmes
to date, will remain high. It is unclear whether the new agreement can boost
Greek consumer and investor confidence sufficiently to stop the economic
contraction (by end-2012 Fitch estimates that the economy will have contracted
by 20% in real terms since 2007).
These risks are reflected in our 'CCC' rating on Greece, which denotes
substantial credit risk.
The above article originally appeared as a post on the Fitch Wire credit market
commentary page. The original article can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.
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