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, according to Fitch Ratings.
“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,” Fitch said.
According to Fitch, 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,” Fitch said.
Fitch said it would not treat a debt buy-back as a credit event provided it was wholly voluntary and had no adverse implications for non-participants.
Fitch 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,” Fitch said, adding that “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.
Fitch said that “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,” Fitch said.