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Moody’s Keeps German Aaa Credit Rating, Fitch Sets Greece at CCC

Moody’s Keeps German Aaa Credit Rating, Fitch Sets Greece at CCC

Daniel Dubrovsky, Contributing Senior Strategist

Talking Points:

  • Moody’s and Fitch updated their sovereign credit ratings for Germany and Greece respectively
  • Germany was affirmed at Aaa with a stable outlook, downgrades possible on Euro Area fragmentation
  • Greece credit rating at CCC, risk to the outlook includes breakdown in Greek/creditor relationships

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Moody’s Investor Service affirmed Germany’s government bond rating at Aaa and maintained a stable outlook. The mark represented the country’s economic strength, which is supported by robust output and productivity growth. In addition, Germany’s strong fiscal position and low funding costs are ensuring that the nation’s high debt levels remain affordable.

Moody’s said that there were some potential downgrade risks to the outlook. Notably, a significant risk of Euro Area fragmentation. This could be prompted by countries such as France and Italy if the perceived risk of their exit from the currency bloc rises sharply.

Additional comments from Moody’s on Germany:

  • Real GDP growth seen at 1.6% in 2017
  • Private consumption to be main German growth driver
  • Debt-to-GDP ratio to fall under 60% by 2020
  • Fiscal surpluses to decrease moderately

Greece also had their credit rating assessed by Fitch. The findings and outlook were made based on the assumption that the second review of the country’s bailout programme is completed ahead of the July debt maturities.

The ratings agency affirmed the country’s long-term foreign and local currency issuer default rating at CCC. Fitch pointed out that the government is broadly complying with the terms of the €86 billion European Stability Mechanism (ESM) programme. They also believe that Greece’s European creditors would be prepared to disburse funds without involvement from the International Monetary Fund. This is in part to avoid political turmoil that may increase the risk of countries leaving the monetary union.

Going forward, Fitch sees some developments that could result in positive ratings action. One of these includes evidence that the recent economic recovery can be sustained. Others may be signs of official sector debt relief and a further track record of successful implementation of the ESM programme.

As for any negative developments that could see the rating fall further, they include: a breakdown in relations between Greece and its creditors, domestic political instability disrupting economic and fiscal policies, and/or a government-declared moratorium on all debt service.

Additional comments from Fitch on Greece:

  • Real GDP growth forecast upgraded to 2.5% in 2017, 3% in 2018
  • 2017 surplus target of 1.75% easier to achieve, 2018 target of 3.5% remains challenging
  • Downside risks remain with respect to the completion of the second review and the payment of the next bailout tranche
  • Greek government may have to adopt fiscal measures that increase the risk of an early election
  • Early elections would provide an additional source of uncertainty that would likely undermine the recent economic recovery

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