Greece Default Risk Declines — for Now

Country risk analysts are cautiously optimistic, at least in the near term.

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Apparently there is such a thing as buying time, and Greece has done it.

The risk of the financially strapped euro zone nation defaulting on its debts is declining, at least in the near term, according to risk analysts and economists whose views are aggregated to produce the September 2013 issue of Country Credit, Institutional Investor’s exclusive semiannual ranking of sovereign creditworthiness.

But they’re far less optimistic about the longer term.

In the last installment of Country Credit, which we published in March, roughly 75 percent of participants said Greece was either likely or highly likely to declare itself bankrupt within two years. In the most recent survey, whose results will be published in full tomorrow, that figure drops to 59.1 percent.

Even so, fully three quarters of the economists polled believe that the Hellenic Republic will default within five years.

Some creditors would argue that Greece has already defaulted, owing to its May 2012 debt restructuring. Athens forced investors to accept new bonds worth less than half the face value of the securities they replaced, thus wiping away roughly €100 billion ($130 billion) of its €350 billion in sovereign debt. The International Swaps and Derivatives Association, which ruled that the action was sufficient to warrant payment of credit default swaps, dubbed the restructuring a “credit event.”

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The country’s economic signals are mixed at best. In August the Finance Ministry reported a primary budget surplus of €2.6 billion for the first seven months of the year, a huge improvement over the €3.1 billion shortfall for the same period in 2012; however, that figure excludes debt-interest payments. The Greek economy continues to shrink, albeit at a slower pace, even as much of the rest of the euro zone is notching gains.

The region’s 18-month recession officially ended in the second quarter, with the economic bloc posting year-over-year real gross domestic product growth of 0.3 percent, according to Eurostat, the Luxembourg-based data gathering arm of the European Commission. During the same period the Greek economy contracted by 4.6 percent. The country has already been bailed out twice — to the tune of some €240 billion from the European Central Bank, the European Union and the International Monetary Fund — and still faces deficits estimated at €4.4 billion for next year and €6.5 billion in 2015, according to the IMF.

Survey participants project similar risk profiles for two other bailout recipients. In March, 18.9 percent of them thought that Portugal would default within two years; today that figure slips to 15.2 percent — but nearly one third still expect the country to be insolvent within five years. Portugal’s economy expanded by 1.1 percent from the first quarter to the second, faster than any EU member country’s, after receding for ten consecutive quarters. But its sovereign debt is huge — more than €214 billion, or roughly 131 percent of its annual output, according to figures released by the Bank of Portugal in August — and its unemployment rate tops 16 percent.

Still, that’s far better than the performance of Spain, where more than one in four people are out of work. Six months ago, 23.6 percent of the Country Credit economists predicted that the nation would default by the end of next year. That figure tumbles to 10.8 percent, but shoots back to 19.4 percent when a five-year time horizon is considered. In August the IMF reiterated its belief that Spain’s economy will shrink by 1.6 percent this year — it slipped 0.1 percent from April through June — but the Washington-based economic association slashed its 2014 growth forecast from 0.7 percent to zero. Spain’s public debt is nearly €944 billion, or about 90 percent of yearly GDP, according to the Bank of Spain.

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