Ratings agency Moody’s announced on Friday it is raising Greece’s credit rating one notch from “Caa3” to “Caa2”, citing the successful completion of the second program review, the improved fiscal prospects, as well as tentative signs the economy is stabilising. It also upgraded its outlook for the country to “positive” from “stable”.
Excerpts of the text below are from the rating agency’s press release:
The key drivers for today’s rating action are as follows:
Successful conclusion of the second review under Greece’s adjustment program and release of a tranche of 8.5 billion euros in the coming days.
Beyond the near-term impact of allowing Greece to repay upcoming maturities, we consider the conclusion of the review to be a positive signal regarding the future path of the program, as it required the Greek government to legislate a number of important reform measures.
Improved fiscal prospects on the back of 2016 fiscal outperformance, expected to lead soon to a reversal in the country’s public debt ratio trend. The government posted a 2016 primary surplus of over 4% of GDP versus a target of 0.5% of GDP. Moody’s expects the public debt ratio to stabilize this year at 179% of GDP, and to decline from 2018 onwards, on the back of continued substantial primary surpluses.
Tentative signs of the economy stabilizing. While it is too early to conclude that economic growth will be sustained, Moody’s expects to see growth this year and next, after three years of stagnation and a cumulative loss in output of more than 27% since the onset of Greece’s crisis.
The decision to assign a positive outlook to the Caa2 rating reflects Moody’s view that the prospects for a successful conclusion of Greece’s third adjustment program have improved, which in turn raises the likelihood of further debt relief.
The euro area creditors have committed to further extend Greece’s repayment terms to the EFSF (European Financial Stability Facility; senior unsecured Aa1 stable) if needed after August 2018 when the program ends. Later repayment to official creditors would improve Greece’s capacity to service debt held by private sector investors, to which Moody’s ratings speak.