Monday 23 October 2017

Greek debt will hit 172pc of GDP next year, IMF predicts

Fitch is third agency to announce C rating

Donal O'Donovan

Donal O'Donovan


The amount the Greek economy has shrunk by this year

Debt crisis

GREEK debt will hit 172pc of GDP next year, the IMF warned last night. It came as rating agency Fitch cut the country's credit rating from B+ to CCC, barely above default.

The IMF is part of the 'troika' of agencies running the Greek bailout programme and last night's report comes after an extensive review of the Greek economy.

The IMF said the Greek economy was shrinking faster than previously expected. Greek national debt will be 172pc of GDP by next year -- as the debt pile grows and the economy shrinks by 3.8pc this year, not the 3pc previously estimated.

The IMF said Greece would have to move faster with financial and structural reforms, or risk default. The news will pile pressure on policymakers to find a solution that cuts Greek debt -- including buying back Greek bonds at a discount. It will also add to calls to end austerity measures widely seen inside Greece as economically damaging.

There was criticism of wider European authorities, too. The IMF noted the lack of progress from Europe on dealing with the debt crisis. It said eurozone countries had to decide on how to bail out Greece and what form "private sector involvement" (PSI) would take.

"Given the impact PSI could have on Greece's credit rating, it is imperative for euro area member states to put in place mechanisms to guarantee liquidity support to Greece's banking system," it said.

Yesterday a German finance ministry spokesman said one plan would be using money from the European rescue funds to buy Greek bonds cheaply, which would effectively make around 40pc of bond debt disappear.

Such a plan has always been controversial because rating agencies would class a distressed buyback as a default. It is increasingly appealing, however, because the losses would largely be carried by private sector bondholders and Greece's overall debt burden would fall.

Some form of Greek default, technical or real, looks increasingly likely. Fitch is the third of the major rating agencies to give Greece a C rating, after Standard & Poor's and Moody's.

Fitch made the cut after reviewing the latest review of Greek finances by the EU and IMF, the agency said.

The new Greek rating "reflects the absence of a new, fully funded and credible" programme by the IMF and EU, Fitch said in a statement.

It said there was also "heightened uncertainty surrounding the role of private creditors in any future funding, as well as Greece's weakening macroeconomic outlook".

While agencies always stress that ratings are simply opinions, many investors are forced to act on ratings cuts. This includes the ECB, which can only hold assets that are highly rated by one of the three main ratings agencies.

The ECB has already waived those rules for Greece, however, and will not be forced to unwind loans to Greek banks as a result of the downgrade.

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