S&P decides against Greek debt downgrade for now

(PARIS) - Standard & Poor's on Tuesday lifted its threat of an immediate downgrade of Greece's debt rating but warned the credit score could fall in the medium term if Athens failed to carry out budget cuts.

S&P said it was maintaining Greece's BBB+/A-2 sovereign credit ratings while adding that the outlook was now "negative" in the medium term and that the rating could be downgraded in the future if reforms were not sustained.

On a positive note, the agency removed Greece from its more immediate "creditwatch with negative implications" listing, which had meant that Athens could have faced a new credit downgrade in the short-term.

S&P had warned on February 24 that it could downgrade Greece's credit rating in the month ahead, citing risks to the country's growth forecast and public support for its reform measures.

But the agency said Tuesday the government's austerity budget -- which seeks to cut the public deficit this year by four percentage points from a huge 12.7 percent of national output -- was "appropriate" to achieve its 2010 fiscal target.

"We view the government's fiscal consolidation programme as supportive of the ratings at their current level, hence our rating affirmation," Standard & Poor's credit analyst Marko Mrsnik said in a statement.

But S&P said it was forecasting a four percent economic contraction in Greece this year, which would force the Socialist administration to implement more spending cuts.

"Despite the new measures, we think it will be difficult for Greece to comply fully with its planned consolidation path, reducing its deficit to 5.6 percent of GDP in 2011 and 2.8 percent of GDP in 2012, if it does not implement additional measures in the coming years," Mrsnik said.

He said the negative outlook "indicates further downgrade potential if the government fails to address negative deviations from its budgetary consolidation path or implement the currently planned structural reforms."

S&P said it expects much weaker growth in the medium term than the government is forecasting and an erosion of the tax base.

The agency warned that if the high premium that Greece is paying to borrow money persists, the country's massive debt burden would likely increase further.

"In light of these considerable budgetary challenges and the difficult economic environment, it remains to be seen whether Greece's leaders will demonstrate the political will necessary to achieve fiscal consolidation," S&P said.

"The negative outlook reflects our view of the government's ability to sustain reform momentum over the medium term," it added.

S&P's rating outlook assesses the potential direction of a long-term credit rating over the medium term, a period ranging between six months and two years. A negative outlook means the rating could be lowered.

The agency said Greece's outlook could be revised to stable if the government complied with its budgetary targets and implemented structural reforms in the social security system, and if borrowing costs eased.

"These factors could, in our view, lead to a reversal in Greece's government debt trajectory," it said.