Greece’s three-year emergency aid package worth as much as 120 billion euros ($159 billion) will meet its immediate financing needs and may help the country keep its investment-grade rating, said Brian Coulton, managing director of Fitch Ratings’ sovereign debt team.
Greece will wind up talks with the European Union and the International Monetary Fund on the terms of the loans in the coming days. Disbursement of the funds to stave off default and progress on cutting the EU’s second-largest budget deficit will probably allow Greece to remain investment grade, Coulton said. Fitch rates Greece BBB-, one notch above junk.
“It’s about as close as you can get, but we expect external support to be forthcoming,” he said in a telephone interview from London yesterday. “We do believe that a bailout package is coming and that it will enable Greece to get through near-term liquidity pressures.”
Greek bonds slumped this week, with the yield on the two-year note topping 22 percent, after Standard & Poor’s lowered its rating three notches to junk on April 27. Moody’s Investors Service, which has the most favorable rating, said yesterday Greece’s creditworthiness may be hit by a “multinotch” downgrade if the government doesn’t cut the deficit enough or the EU fails to agree on a united response to the crisis.
Moody’s, which rates Greece four notches above junk at A3, will make a decision after the government announces details of the budget steps agreed to with the IMF and the EU. Prime Minister George Papandreou’s government has accepted budget cuts worth 10 percent of gross domestic product, or 24 billion euros, in the next two years as a condition for the emergency loans, said union officials who met with him yesterday.
The talks will be concluded in “the next days” European Economic and Monetary Affairs Commissioner Olli Rehn said yesterday. The timing of the disbursement is becoming critical as Greece faces 8.5 billion euros in maturing bonds in May.
The involvement of the IMF and the EU will help build confidence in Greece, which has seen its credibility damaged by regular revisions to its economic data over the years and failed promises on deficit reduction.
“Greece has particular problems with respect to the strength of fiscal institutions and management and hence the credibility of its fiscal adjustment plans,” Coulton said. “This underscores the importance of ‘importing credibility’ from external institutions such as the IMF and the EU.”
Greece, which has a budget shortfall last year of at 13.6 percent of GDP last year, will have a more difficult time reducing the gap than other high-deficit nations such as Portugal and Spain, Coulton said.
The situation in Portugal, with a shortfall of 9.4 percent of GDP and a contracting economy, is “less serious” than in Greece because its government has a track record of deficit reduction, he said.
“The government has a lot more credibility; it made a lot of inroads reducing the deficit before the crisis struck,” he said. “The credibility of the government plan is significantly better than Greece.”
Spain, with a shortfall of 11.2 percent, has “far more aggressive plans” than the U.S. to pare the deficit, Coulton said. The biggest threat to Spain’s efforts would be a sustained economic slump and high private debt. S&P also cut Spain’s credit rating to AA, saying the government’s economic-growth forecasts are too optimistic. Unemployment topped 20 percent in the first quarter, a report said today.
“Our biggest concern is can the Spanish economy return to robust growth in the medium term?” Coulton said. “Spain also has a lot of private-sector debt, related to the property-development boom. And the labor market is not flexible in Spain. Wage adjustment that would help recovery would be harder.”