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S&P Sells Out (Again), Confirms Greece At BBB+, Removes Greece From CreditWatch Negative, Sends Market Higher

Courtesy of Tyler Durden

In case you were wondering what just sent the market and commodities higher, and killed the dollar, look no further: S&P just released a note confirming Greece at BBB+, and removing the country from CreditWatch negative, presumably a major euro positive, a major dollar negative, and today’s nitrous boost to stocks… Here is the forest for the trees: the market is again dependent on the moronic filth spewed forth by rating agencies. As to what turbo austerity will do to Greek GDP, ah, who cares. S&P will cross that bridge when Greek GDP plummets 10%.

Overview

  • We view the Greek government’s total package of deficit reduction measures as appropriate to achieve its 2010 fiscal target, given the deterioration in Greece’s growth prospects.
  • We are affirming our ‘BBB+/A-2′ sovereign credit ratings on Greece and removing them from CreditWatch negative.
  • The negative outlook reflects our view of the government’s ability to sustain reform momentum in the medium term.

Rating Action

On March 16, 2010, Standard & Poor’s Ratings Services affirmed its ‘BBB+’  long-term and ‘A-2′ short-term sovereign credit ratings on the Hellenic Republic (Greece). At the same time, the ratings were removed from CreditWatch, where they had been placed with negative implications on Dec 7, 2009 (the long-term rating) and Dec. 16, 2009 (the short-term rating). The outlook, which was stable prior to the CreditWatch placement, is now negative.

Rationale

On March 5, 2010, the Greek parliament approved its third set of deficit reduction measures to reinforce its budgetary consolidation strategy and meet its deficit target of 8.7% of GDP in 2010. We view the government’s fiscal consolidation program as supportive of the ratings at their current level, hence our rating affirmation.

The additional package--which we understand should reduce the deficit by €4.8 billion--includes measures on both the revenue side, such as increases in VAT rates and excise tax duties, and the expenditure side, such as cuts in the public wage bill, public investment, and current spending, which will bring the total budgetary effort for 2010 to €16 billion (6.9% of 2010 GDP) according to the government’s estimates. We view the government’s total package of measures as appropriate to achieve its 2010 fiscal target, given the deterioration in the country’s growth prospects. According to our revised growth forecast, we expect the recession to continue, with real GDP contracting by 4% this year.

Despite the new measures, we think it will be difficult for Greece to comply fully with its planned consolidation path, reducing its deficit to 5.6 % of GDP in 2011 and 2.8% of GDP in 2012, if it does not implement additional measures in the coming years. We expect much weaker medium-term growth than official forecasts, and, consequently, an erosion of the tax base, while, in addition, we understand that age-related expenditures are likely to increase by 0.8% of GDP over 2010-2015. Moreover, in our opinion, if the currently high borrowing costs persist--the spread on Greece’s recently issued 10-year bond was 300 basis points above the mid-swap--the large and growing debt burden, which we currently expect to peak at about 133% of GDP in 2012, is likely to increase further. In light of these considerable budgetary challenges and the difficult economic environment, it remains to be seen whether Greece’s leaders will demonstrate the political will necessary to achieve fiscal consolidation. However, our base-case scenario is that the Greek government will implement the necessary reforms to engender sufficient market confidence to reduce borrowing costs.

Notwithstanding potential extraordinary support from European Economic & Monetary Union (EMU) member states, we reiterate that our ratings on Greece will continue to depend on its stand-alone credit rating fundamentals and not benefit from an implicit rating floor. However, extraordinary EMU member state assistance would, in our view, help the Greek government meet its targets.

Outlook

The negative outlook reflects our view of the government’s ability to sustain reform momentum over the medium term. It indicates further downgrade potential within the next 18-24 months if the government fails to:

  • Address negative deviations from its budgetary consolidation path, including those due to persistently high borrowing costs; or
  • Implement the currently planned structural reforms, due, among other things, to an eventual faltering in political resolve to push through the necessary reform measures.
  • Either shortcoming would, in our opinion, delay the reversal of the government debt trajectory and could lead to lower ratings.

An outlook revision to stable would be possible in the event of compliance with the government’s budgetary targets, implementation of structural reforms in the social security system, and an easing of borrowing costs. These factors
could, in our view, lead to a reversal in Greece’s government debt trajectory.


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