Senior Fitch Ratings officials have expressed their optimism in comments to Kathimerini about Greece’s fundamentals in 2020, just a few days after the agency upgraded the country’s credit rating one notch, and offered a roadmap out of “junk” territory.
Michele Napolitano, senior director and head of Western Europe Sovereigns at Fitch visited Athens last week for the company’s conference on Greece’s credit prospects. He told Kathimerini that the government’s 2.8 percent growth target for this year is feasible and that the reduction of the primary surplus targets would be very important if attained.
Napolitano concedes it is difficult to forecast Greek growth “as numbers are quite volatile,” though Fitch has raised its growth forecast for this and next year to 2.5 percent.
Mr Napolitano, Greece issued a 15-year bond last week and attracted strong demand from long-term investors. How important is this step for Greece?
It sends a positive signal to the market because it consolidates the presence of Greece in the international capital market, which should also be positive for other Greek issuers, for banks and corporates. Greece doesn’t really need to issue given the its gross financing requirements. The Public Debt Management Agency is issuing in order to send a signal to investors and also to test the quality of investors. Issuing successfully a 15yr bond implies that there is a significant number of institutional investors, long term investors willing to invest in Greece, that have confidence in Greece. We believe issuing a 15yr bond can also help the government in constructing the narrative that confidence in Greece is coming back.
Fitch’s key assumption in its latest credit report on Greece was that there will be an agreement for the lowering of 1 percent the target from 2021 onwards. How has Fitch come to the 1 percent reduction projection. And, in case there is no agreement, will Greece’s rating and outlook be affected?
What we have written in the report is based on our analysis that if the primary surplus is reduced by 1 percent and the proceeds are used to fund some growth friendly measures (which could have a positive impact on growth) the impact on the debt trajectory, on the debt dynamics could actually be positive.
How we came up with the 1 percent? It is simply because this figure is the one that has already been quoted widely in the press, rather than us ourselves sending a signal to the creditors. To be very clear, our projection for 2.5 percent surplus in 2021 is based on this analysis and we assume that the reduction would be agreed with the creditors. We are not making a judgment that Greece will miss the targets.. What we are saying is that a reduction in the primary surplus to 2.5 percent of GDP would not be negative for the debt dynamics and could prove to be positive for sovereign credit worthiness if there was a positive impact on growth.
Clearly, a good relationship with the creditors is important so if there was a reduction in the targets it would be after an agreement between Athens and the creditors.
The reduction of the surplus targets is one of the three requests the Greek government has submitted to the creditors so as to secure some additional fiscal space.The two other requests are a)the option of transferring any primary surplus overruns to the following year (smoothing mechanism), and b) the use of SMPs and ANFAs for investments. Will an agreement on these be considered credit positive by Fitch?
If there was an agreement on the three requests the Greek government has made to the creditors it would mean that Greece is on track, it is delivering on a number of areas that are also important for Fitch’s rating assessment, it would be a sign that things are moving in the right direction. It is too early to tell whether the package could have a positive credit impact.
The Greek government has stated that it aims to regain investment grade by H1 2021. Is this target an achievable one? Could you name the factors that Fitch is/will be looking at in order to move Greece to the IG club?
Getting back to investment grade in this time framework (1H 2021) is challenging but not unfeasible. The main factors that we are looking at are:
Firstly, developments with investments. In order to be confident with the Greek story and the Greek debt sustainability analysis over time, Greece needs to grow to sustainable rates and given the collapse in investment since the crisis there is need for investment in quite a lot of areas of the economy. So developments with investment, ability to attract investments, reforms to try and make Greece more attractive to investment is something that can support the rating upwards.
Second factor is the banking sector. Acceleration of the reduction in NPLs, how the Hercules plan will work in practice, reform of the insolvency regime and if it will accelerate an improvement in banking sector metrics, if there are upgrades from Fitch’s banking team on the individual rating of the banks, are also factors that would affect the sovereign rating.