Fitch downgraded the outlook of the Greek economy to “stable” instead of “positive”, while maintaining the rating at BB. It is worth noting that Fitch made announcements without anything planned for Greece, while in a few hours announcements are planned by S&P and DBRS. At present, no changes are expected in the country’s rating, only in the perspective of credit rating.
The agency notes that this move reflects the significant impact of Covid-19 on economic activity, public finances and external balance. It predicts a decline of 8.1% of GDP this year and a partial recovery in 2021, with a GDP increase of approximately 5.1%.
The recession and subsequent recovery are subject to significant uncertainties. Prolonged lockdown or a second wave in Greece or Europe will mean a bigger drop this year and a smaller recovery next year. The rating agency makes a special reference to tourism, which corresponds to about 10% of GDP.
The shrinking of economic activity and government support measures are reversing the fiscal picture. The government announced measures corresponding to 5 billion euro (2.9% of GDP), while an additional 2 billion euro are expected from European support. Fitch estimates that the general government balance from a surplus of 1.5% of GDP in 2019 will “return” to a deficit of 7.4% this year. In 2021, it is expected to fall to 4.6% of GDP. A primary deficit will be recorded this year, after four consecutive years of surpassing the target surplus.
The increase in borrowing will translate into a reversal of the downward trend in the debt/GDP ratio. It is estimated that it fell to 176.6% at the end of 2019, but at the end of 2020 it will reach 194.8% before falling to 187.1% in 2021. Fitch’s assumption is that this year the government will only withdraw 1/4 from the safety cushion (about 10 billion euro). If it did not do so and proceeded exclusively with new borrowing, the debt would rise above 200% of GDP.
Fitch, however, acknowledges that while the debt is very high, there are positive factors that limit risks. The liquidity cushion is more than enough to meet the increased funding needs this year and 2021. Most of the debt is the country’s aid from the EU, 95% is at a stable interest rate and with a large average maturity (20.5 years). In addition, the ECB included government bonds in the extraordinary securities market program, which allows the central bank to proceed with purchases of around 16 billion euro through the secondary market./ibna