Moody's: Greek risks still elevated given weak institutions and political scepticism

Although the Greek parliament accepted austerity measures preventing the country from an immediate default, there are still considerable risks ahead, notes ratings agency Moody’s.

Greece’s fiscal strength was “low” and the potential to reduce its debt burden was not clear:

"The Greek parliamentary vote averts an immediate disorderly default and potential exit from the euro area, but risks remains elevated given Greece’s weak institutions and substantial political scepticism on the bailout conditions," the agency said.

The vote should allow the Greek government to obtain much-needed liquidity to fulfil its upcoming large external payment obligations for at least the next month.

However, there is still considerable uncertainty regarding the ability of Greece and its official creditors to conclude a final agreement on a third program to receive sustained funding, "especially given the short time frame within which the program has to be negotiated."

Judging by the deep economic problems and social divisions within society, even if an accord is reached, it is highly uncertain whether the Greek government has the capacity to achieve agreed objectives and to abide by its creditor’s conditions, says Moody's.

"We assess Greece’s Fiscal Strength as low, because of the country’s high debt burden, which stood at around 177% of GDP at the end of 2014, one of the highest debt burdens in the universe of Moody’s-rated countries."

Another uncertainty which the agency underscores is the potential to meaningfully improve Greece's debt trend over the next 3-5 years as the large-scale reforms that could drive growth are currently halted by ongoing political uncertainty.

"Against the backdrop of considerable decline in economic activity in the last six months, and even with a support programme in place, we expect non-performing loan ratio to increase to 40-45% up from 35% of all outstanding loans in December 2014.

Given that current provisioning levels are weak, higher provisioning charges are likely to raise further solvency issues for banks."