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Fitch upgrades Greece on improving debt sustainability

Fitch Ratings on Feb. 16 upgraded its long-term foreign-currency issuer default rating on Greece to B from B-, with a positive outlook, on expectations that the country's general government debt sustainability will improve.

Debt relief expected from the Eurogroup this year will help keep gross financing needs below 15% of GDP in the medium term and below 20% of GDP thereafter, the rating agency said, adding that it expected Greece and its creditors to aim for a "hybrid clean" exit from the €86 billion European Stability Mechanism, or ESM, bailout fund in August.

The Eurogroup's initial work on a "growth adjustment mechanism," which would link debt relief measures to post-bailout program growth outcomes, should increase confidence in a sustainable debt recovery path, Fitch said. Greece is also showing signs of its return to regular bond issuance, which would help the country build a sizeable deposit buffer.

Political backdrop risk is limited as the measures adopted by the government under the ESM program would be difficult to reverse once the said program ends.

The Greek economy is projected to grow 2.1% in 2018 and 2.6% in 2019.

Fitch forecast an average primary surplus of 3.4% of GDP through 2022. General government gross debt should decline to 151% of GDP by 2022 assuming nominal GDP growth is at 3.9%.

The agency would consider a positive ratings action if it sees further primary surpluses, sizeable debt relief, policy continuity and lower risks of "crystallization" of the banking sector.

It could, however, consider a negative ratings action in the event of a loosening or reversal of policies under the ESM program, lowered debt relief prospects from the Eurogroup or adverse developments in the banking sector.