Fitch Ratings-London-13 July 2011: Fitch Ratings has downgraded Greece's Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'CCC' from 'B+. The Short-term foreign currency IDR is also downgraded to 'C' from 'B' and the Rating Watch Negative (RWN) on all three ratings has been removed. The agency has affirmed the euro area Country Ceiling at 'AAA', which is applicable to all euro area member states, including Greece.
The downgrade follows the assigning of a RWN on Greece's ratings on 20 May. At that time, Fitch stated that it would resolve the RWN in light of the conclusion of the fourth review of Greece's economic programme by the IMF and that in the absence of a fully-funded and credible EU-IMF programme, Greece's sovereign ratings would likely be lowered to 'CCC'. Moreover, Fitch's previous rating of 'B+' was premised on the judgement that provision of new money would not be conditional on private sector participation in any new and enhanced EU-IMF programme that would potentially result in a default event.
Today's rating downgrade reflects the absence of a new, fully-funded and credible EU-IMF programme for Greece, coupled with heightened uncertainty surrounding the role of private creditors in any future funding, as well as Greece's weakening macroeconomic outlook.
New money is required to address Greece's fiscal funding shortfall that would otherwise emerge in 2012 - a key weakness of the current EU-IMF programme highlighted by Fitch at the turn of the year. Fitch had expected the uncertainty surrounding new money, along with the role of private creditors, to be resolved with the completion of the fourth review of the current EU-IMF programme earlier this month. The agency notes that while the main parameters of a new multi-annual adjustment programme were discussed at an Ecofin meeting on 11-12 July, no further clarity on the volume and the terms of new money or the nature of private sector participation was forthcoming.
Fitch remains of the opinion that any additional financial support for Greece will only be credible in providing a path to fiscal solvency if it is fully funded beyond the end of the current programme in mid-2013. New European Commission estimates of gross fiscal financing needs of EUR172bn up to mid-2014 imply substantial additional EU-IMF financial support over and above the EUR110bn already committed. However, the agency is concerned that reliance on privatisation receipts of EUR30bn and largely unquantifiable private sector participation to supplement official new money would leave a new programme vulnerable to future funding shortfalls, subjecting Greece to continuing uncertainty. While asset sales of EUR5bn look attainable in 2011, the privatisation programme will become increasingly challenging.
Fitch believes any new programme must be backed by credible policy targets. The successful passage through parliament of the Medium Term Fiscal Strategy at the end of June sent a strong message that the Greek authorities remain fully committed to the EU-IMF programme. However, official new data for the first six months of 2011 point to expenditure overruns and revenue shortfalls, highlighting the urgent need for recently legislated new measures for 2011, while there are growing doubts about the capacity of the Greek economy to withstand further fiscal consolidation in a climate of continuing economic and financial uncertainty. Thus, a further contraction in economic activity of some 4% of GDP now looks likely in 2011, followed by a weak recovery in 2012.
Fitch's 'CCC' rating encapsulates substantial credit risk and acknowledges that default is a real possibility. As previously stated by Fitch, private sector involvement would likely be viewed as a sign of sovereign credit impairment and could trigger a rating default event.