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Greece’s rating raised by S&P as budgetary risks subside

[ATHENS] Standard & Poor's raised Greece's sovereign credit rating by one notch, signalling confidence in the country's new government and its policies.

Coming 16 months after it last upgraded Greece's rating, S&P said in a statement Friday that it is raising the country's long-term foreign currency debt to BB- from B+. The ratings agency's outlook remains positive.

Still, the new rating keeps Greece three levels below junk, showing that the country has to do more to regain its investment-grade rating. European Central Bank President Mario Draghi said this week that while Greece has turned the corner, it must continue reforms.

"Our ratings on Greece reflect the improving economic outlook, accompanied by strong budgetary performance and a favorable government debt structure," S&P said in the statement. "These compare with the country's high external and public debt, still-pressured banking system with large NPEs (non-performing exposures), and challenged monetary transmission mechanism."

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Since July, when he was elected, the new pro-business Prime Minister Kyriakos Mitsotakis has managed to secure creditor approval for his 2020 budget, unlocked the flagship investment in Hellinikon - which envisages the transformation of a former airport site on the Athens riviera - and got the European Commission's green light for an ambitious plan, known as Hercules, to help banks cut their bad loans by some 30 billion euros (S$45.37 billion).

Investors have responded. Greek bonds yields are at record lows, the Athens Stock Exchange Index is up 42 per cent year to date and the country has even managed to borrow at negative yields for three months.

The recovery, however, hasn't been enough to erase the economic pain that began a decade ago when Greece was the epicenter of the European financial crisis. The country's gross domestic product has shrunk by 25 per cent and it still has the highest debt-to-GDP (gross domestic product) ratio in the euro area. Critically, it needs to fix its banking sector by reducing the mountains of bad loans so lenders can grease the wheels of the real economy. Non-performing exposures are currently at 75 billion euros, which equals to 40 per cent of country's output, and have to be cut by some 50 billion euros by end-2021 for banks to meet their regulatory targets.

"We could revise the outlook to stable if economic growth is significantly weaker than we expect or reform implementation stalls, hampering the reduction of government debt and the financial sector's restructuring," S&P said in the statement.

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At the beginning of 2019, Greece said it aims to raise as much as 7 billion euros through new bond sales. Taking advantage of the global low-yield environment, it has managed to raise 9 billion euros so far, part of which will be used for the early repayment of 2.7 billion euros of its most-expensive IMF (International Monetary Fund) loans.

For 2020, the country's financing needs are projected to be 2 billion euros and are already secured. That doesn't mean Greece won't issue new debt next year, but it can do it without the pressure of refinancing it.

S&P projects that Greece's general government gross and net debt-to-GDP ratios will decline from 2019, aided by a recovery in nominal GDP growth and large current account surpluses.

The lower borrowing costs pave the way for the government to ask creditors for lower fiscal targets in 2021 and beyond. When European creditors update their debt-sustainability analysis for Greece - most probably in November - they will have to factor in the lower yields. The government wants to capitalise on the new environment to discuss a change in the agreed primary surplus targets.

S&P puts Greece's budget surplus in 2019 at around 1.3 per cent of GDP, up from about 1 per cent in 2018. This implies a primary balance of about 4.3 per cent of GDP, which significantly outperforms the target of 3.5 per cent agreed with creditors, S&P says.

Fitch Ratings affirmed its BB- rating for Greece in August, while Moody's rates the country B1, the lowest among the three rating companies.

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