Moody's Investors Service ("Moody's") has today upgraded Greece's long-term issuer rating as well as all senior unsecured bond and programme ratings to Caa2 and (P)Caa2 from Caa3 and (P)Caa3, respectively. The outlook has been changed to positive from stable.
Greece's short-term ratings have been affirmed, at Not Prime (NP) and (P)NP.
The key drivers for today's rating action are as follows:
1. Successful conclusion of the second review under Greece's adjustment programme and release of a tranche of €8.5 billion 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 programme, as it required the Greek government to legislate a number of important reform measures.
2. 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.
3. 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 programme 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 programme 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.
The long-term country ceilings for foreign-currency and local-currency bonds have been raised to B3 from Caa2, to reflect the reduced risk of Greece exiting the euro area, and the long-term ceiling for foreign-currency and local-currency deposits has been raised to Caa2 from Caa3. Moody's maintains a two-notch gap between the bond and the deposit ceilings to reflect the ongoing capital controls. The short-term foreign-currency bond and bank deposit ceilings remain unchanged at Not Prime (NP).
