And A Little Fuel To The Fire: Greece Downgraded By Fitch

Fitch Ratings-London-20 May 2011: Fitch Ratings has downgraded Greece's Long-term foreign and local currency Issuer Default Ratings (IDR) to 'B+' from 'BB+ and the Short-term IDR remains at 'B'. All three ratings have been placed on Rating Watch Negative (RWN). The agency has simultaneously affirmed the euro area Country Ceiling at 'AAA', which is applicable to all euro area member states, including Greece.
The rating downgrade reflects the scale of the challenge facing Greece in implementing a radical fiscal and structural reform programme necessary to secure solvency of the state and the foundations for sustained economic recovery. Implementation and political risk have risen as further fiscal austerity measures are required to realise the 2011 budget deficit goal of 7.5% of GDP due to the under-performance of tax receipts and higher deficit outturn for 2010 than originally targeted. Moreover, the greater emphasis on privatisation has heightened the risk that the policy conditional funding under the EU-IMF programme will be delayed given the political and technical obstacles to the realisation of EUR50bn of asset sales. Nonetheless, Fitch does expect some assets sales by year-end, albeit relatively modest, and continues to believe that the Greek government remains committed to the programme and to honouring its sovereign debt obligations.
The 'B+' rating incorporates Fitch's expectation that substantial new money will be provided to Greece by the EU and IMF and that Greek sovereign bonds will not be subject to a 'soft restructuring' or 're-profiling' that would trigger a 'credit event' and default rating from Fitch.
An extension of the maturity of existing bonds would be considered by Fitch to be a default event and Greece and its obligations would be rated accordingly. If contrary to Fitch's expectations, private sector 'burden sharing' as a condition for new money extends beyond exhortation and is coercive, the credibility of policy commitments regarding the European Stability Mechanism and EU-IMF programmes for Ireland ('BBB+'/Negative) and Portugal ('BBB-'/RWN), as well as Greece, would be severely diminished and in Fitch's opinion would adversely impact financial stability across the euro area.
New money is required in order to address the fiscal funding shortfall that would otherwise emerge in 2012, a key weaknesses of the current EU-IMF programme highlighted by Fitch following its previous rating action on Greece at the turn of the year. Fitch expects the uncertainty regarding the volume and terms of new money, as well as the role of private creditors, to be resolved with the completion of the current fourth review of Greece's EU-IMF programme expected in the latter half of June.
The RWN will be resolved in light of the conclusion of the current review of the EU-IMF programme. In Fitch's opinion, additional financial support for Greece would only be credible in providing a path to solvency if it is fully funded beyond the end of the current programme of mid-2013, implying substantial additional EU-IMF financial support over and above the EUR110bn already committed. Fitch will also incorporate into its review of Greece's sovereign ratings under the RWN the terms upon which new money is provided and the credibility of the associated policy conditionality.
The current 'B+' rating would likely be affirmed if an extended and fully-funded EU-IMF programme is articulated, backed by credible policy targets and, as Fitch expects, private sector participation will not be 'involuntary' or require a change in the terms and conditions of existing Greek sovereign bonds.. In the absence of a fully funded and credible EU-IMF programme, the rating would likely fall into the 'CCC' category indicating that a Greek sovereign debt default was highly likely.


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