Fitch Downgrades Greece to 'BBB-'; Outlook Negative (thats a shocker, downgrade the credit just before the default)

Fitch Downgrades Greece to 'BBB-'; Outlook Negative   
09 Apr 2010 10:28 AM (EDT)

---

Fitch Ratings-London-09 April 2010: Fitch Ratings has today downgraded Greece's Long-term foreign and local currency Issuer Default Ratings to 'BBB-' from 'BBB+'. The Outlook is Negative. The agency has simultaneously affirmed Greece's Country Ceiling at 'AAA' and the Short-term foreign currency IDR at 'F2'.

The downgrade reflects the intensification of fiscal challenges in response to more adverse prospects for economic growth and increased interest costs. It also reflects ongoing uncertainties about the government's financing strategy in the context of increased capital market volatility.

The sharp rise in interest rates faced by the government this year, in combination with a deterioration in the outlook for economic growth, will make it harder for the government to achieve its fiscal targets of reducing the deficit to 8.7% of GDP this year and ensuring that public debt peaks at just over 120% of GDP in 2010 and 2011. Pressures on the banking system underline the adverse spill-over from sovereign risk concerns on the wider economy, while contingent liabilities from the banking sector will increase as the government provides banks with increased guaranteed funding.

Fitch recognises some early indications of improvements in fiscal outturns and the strength of the government's commitment to fiscal consolidation measures, which have been supported by Greece's euro area peer governments. However, given that the credibility of the fiscal consolidation effort will only be established by sustained deficit reduction over a prolonged period of time, it is vital that the Greek authorities import credibility from external institutions, underpinned by a credible commitment of financial support. The agency reiterates the lack of clarity regarding the mechanism for timely external financial support may have hindered Greece's access to market finance at affordable cost and hence further undermined confidence in the capacity of the government to meet its fiscal targets. While Fitch judges that external financial support is likely to be forthcoming, greater clarity on back-stop financial support in the form of an explicit IMF programme is likely to be required to shore up market confidence in the face of still substantial near-term financing needs.

The Negative Outlook reflects substantial uncertainties remaining over the prospects for sustained fiscal consolidation over the medium term.

Applicable criteria, 'Sovereign Rating Methodology', dated 16 October 2009, are available on www.fitchratings.com.

Contact: Chris Pryce, London, Tel/email: + 44 20 7417 4342/chris.pryce@fitchratings.com; Paul Rawkins, +44 20 7417 4239/paul.rawkins@fitchratings.com

Media Relations: Julian Dennison, London, Tel: +44 020 7682 7480, Email: julian.dennison@fitchratings.com; Peter Fitzpatrick, London, Tel: + 44 (0)20 7417 4364, Email: peter.fitzpatrick@fitchratings.com.

Geece - Dates coming up to watch 04/09/10 $EWG $NBG

Geece - Dates coming up to watch

• This weekend – activation of IMF-EU rescue? Reuters reported that a deal has been reached on the specific terms of a rescue but its not clear if Athens has requested the plan to be activated. In terms of the parameters of IMF debt, for loans up to three years, Greece will be charged the SDR rate plus 300 bps plus 50 bps service charge (per Reuters).

• Apr 13 - Greece will auction a total of 1.2 billion euros ($1.6 billion) of six- and 12-month T-bills on April 13

• April 20 - Bond redemption for E8.22 billion

• Apr 22 - Greek strikes - Greek civil servants will walk off the job for 24 hours on April 22 to protest against austerity measures which they say burden only the poor, a union (ADEDY) official said on Friday. Reuters

CEEMEA Rates Trade Idea Pay 5y Turkish CCS

Rationale: The TRY 5y CCS seems to be trading at the bottom of the range (10-10.80). Given our economists’
view that CPI inflation will climb higher this year before starting to fall in 4Q10 (Exhibit 1), the risk/reward of
tactically paying rates in Turkey looks attractive to us.

While we acknowledge that the curve is already quite steep, we do not think that sufficient rate hikes are priced in at the moment. Based on our estimates, the curve is pricing in around 250bp of hikes by end-2011,
compared with Morgan Stanley’s forecast of 325bp.

Real yields are also reaching a turning point. Given the historically strong relationship between real GDP and real yields, we think that real yields are close to the
bottom and should turn around soon, following the trend in real GDP. Even as inflation starts to fall after 4Q10, we think that nominal yields should continue to rise, given our economists’ GDP forecast of 4%Y at end-2010 and 4.2%Y at end-2011.

Oil and food also pose upside risks to our inflation
forecast, in our view. Furthermore, the longer the CBT
keeps rates on hold, the higher the likelihood that
inflation expectation might deteriorate further, thus
mitigating some of the (positive) base effects from 4Q10.
Carry/rolldown: Over a 1-month period, the
carry/rolldown on a pay 5y CCS position is around -9bp.
This compares more favourably with -20bp in 2y and
-22bp in 1y.

Alternatives: We still like paying breakeven inflation by
holding 2y linkers versus paying 2y CCS.
Key risks: Persistent lira strength, a significant
improvement in inflation profile (e.g., lower oil or food
prices), a potential IMF package and a lower domestic
debt rollover ratio in March and April could put
downward pressure on rates, in our view.

Link here

Economics Group MONTHLY OUTLOOK February 10, 2010

Sovereign Debt Concerns in Southern Europe

In response to market concerns over its indebtedness, the Greek government has proposed an ambitious fiscal adjustment plan over the next few years. In order to help stabilize the government’s debt-to-GDP ratio, however, nominal GDP growth in Greece needs to rebound. But the common currency that Greece shares with the other members of the euro area precludes strong export growth via real exchange rate depreciation, which will hamper its ability to achieve strong growth in nominal GDP. In our view, there is a significant probability that Greece will need financial support from the European Union (EU) and/or the IMF to help the government smooth out its fiscal adjustment. The fiscal situations in both Portugal and Spain are not as dire as they are in the Hellenic Republic, but these two countries may also need financial support if investors remain spooked.

Growth Is Not Nearly as Strong Beneath the Surface

Expectations for near-term growth have been ratcheted up, following the fourth quarter’s robust 5.7 percent real GDP growth. While that number came in almost precisely in line with our forecast, we have raised our estimate for first quarter growth and slightly reduced our expectations for growth during the second and third quarters. The adjustments were necessary because inventories are correcting much more quickly than originally thought. Inventories added 3.4 percentage points to fourth quarter GDP growth and are expected to add another 1.2 percentage points to growth during the first quarter.


00000010