Greece making progress but risks remain high, says Fitch

Eurogroup’s additional approved funding to Greece has shown an improvement in relations with its eurozone lenders, ratings agency Fitch said, but it feels there is a high risk that the programme will go "off track".

On Monday, the Eurogroup of eurozone finance ministers had waved through €2.8bn after the Greek authorities successfully implemented the 15 milestones or reforms required, which included privatizing state assets, tax and pensions and bank governance.

Of this, the country is due to receive €1.1bn from the European Stability Mechanism (ESM) for debt servicing and a further €1.7bn by the end of October for clearing debt arrears.

Fitch said the arrears repayment would support private consumption and contribute to its GDP forecast of a moderate pick-up in later this year, followed by growth of 1.8% in 2017.

“The latest approval demonstrates that relations between Greece and its official creditors remain on a firmer footing than in 2015, particularly in view of the highly front-loaded policy conditionality of the ESM programme.”

“However, progress in meeting the milestones has been slower than expected, even though they are less demanding than the earlier measures required under the first programme review, such as pension and income tax reform. We think this reflects the Greek government's competing policy priorities and relatively weak domestic political ownership of the programme.”

There was a delay in the implementation of the reforms, which Fitch believes underlines the “government’s slim majority and ideological position in parliament to some of the reforms”.

The focus is now on the second programme review due to start later this month, of which labour market reform is likely to be the most critical component.

Fitch estimates that the Greek government has sufficient funds to carry negotiations into next year but felt there is a high risk that the programme will go "off track", which is reflected in their ‘CCC’ rating.

“The prospect of government debt relief could become an important driver of programme compliance if it incentivises the Greek authorities to meet programme conditions. However, we think it could have the opposite effect if the Greek government and population come to view substantial debt relief as distant or unlikely.”

The current migrant crisis will also weigh on Greece’s economy. The cost to Greece’s GDP of having more than 60,000 people stranded on its shores was 0.4% of GDP in 2015 and will rise this year according to Organisation for Economic Co-operation and Development (OECD) estimates.