Wednesday, May 13, 2009

Fitch Cuts Greece Rating Outlook

ATHENS, May 12 (Reuters) - Fitch Ratings cut its outlook for Greece from stable to negative on Tuesday, saying it was sceptical the conservative government could manage public finances during difficult economic times.

Fitch kept its 'A' rating on Greek debt and will not rush a rating decision but it will keep a close watch on the heavily indebted country's deficit and debt ratio for any future move, Fitch analyst Chris Pryce told Reuters.

"The authorities consistently over-estimate revenue while slippages in expenditure reflect weak controls and a lack of political will," Pryce, a director in Fitch's sovereign team, said in a statement.

Fitch's outlook cut is the second outlook downgrade by a rating agency this year for Greece, the euro zone's most heavily indebted member after Italy as a percentage of GDP.

Greece's conservative government with a wafer-thin majority in parliament has struggled to impose painful economic reforms in the face of a series of scandals as well as recurrent street riots which followed the fatal shooting of a teenager by police last December.

"Fitch is sceptical of the authorities' ability to manage public finances in a more difficult global economic environment and forecasts that the deficit and public debt will rise to 6 percent and 106 percent of GDP respectively in 2009, significantly above official projections," Pryce added.

The move follows downgrades by rating agencies this year on other euro zone members Ireland, Spain and Portugal. Spreads of Greek government bonds over benchmarkb German bonds rose to 180 basis points from 176 after the outlook change.


In February, Moody's Investors Service cut its outlook for Greek government bonds to stable from positive but said at the time a rating downgrade was no more likely than an upgrade over the next 12-18 months.

Standard & Poor's cut Greece's sovereign rating one notch to A-/A-2 in January with a stable outlook, citing a loss in economic competitiveness due to high wage inflation and the persistently high budget deficit.

"The key is public finances," Pryce told Reuters. "There would also have to be a genuine reduction in debt; the Greek government must wean itself off resort to debt."

The European Commission expects Greece's debt to reach 103.4 percent of GDP this year and 108.0 percent next year.

The financial crisis has widened the premium Greece must pay on its bonds compared to higher-rated core European issuers like Germany at a time when a slowing economy and weak government revenues boost public borrowing needs.

Greece's conservatives cling to a one-seat majority and narrowly avoided being forced to call snap polls over a bribe scandal last week.

"I am sceptical as to whether the government can fix the state finances with such a narrow majority. They have no choice but to try, but the probability that they'll manage to do it is small," said Sebastian Wanke, an economist at DekaBank.

Analysts said the harsh Fitch statement was not a surprise, given Greece's deteriorating finances, and was not expected to have a major impact on spreads but a rating downgrade would affect the whole bloc.

"Any suggestion that the country's single-A rating could be cut would be more serious for the entire euro zone," said David Schnautz, a bond analyst at Commerzbank in Frankfurt.

Pryce said he did not expect Fitch to take a further step regarding Greece in the next six months. "We could do, if there were any further shocks from Greece," he added.

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