Fitch: Greek deal positive but financing lags, risks remain

The likely agreement to extend Greece's financing agreement for up to four months significantly reduces the near-term risk of a breakdown in relations between the Greek government and the country's official creditors, Fitch Ratings says. This is positive for Greece's sovereign credit profile, but it does not fully address uncertainties around sovereign and bank financing or necessarily ensure the success of follow-up negotiations.

The European Commission, the ECB, and the IMF told eurozone finance ministers on Tuesday that they considered the Greek government's reform proposals "sufficiently comprehensive to be a valid starting point for a successful conclusion of the review" of Greece's existing programme. The Eurogroup said that it had therefore "agreed to proceed with the national procedures with a view to reaching the final decision."

This will involve approval by some eurozone national parliaments, after which the programme, which was due to expire on Saturday, is set to be extended to the end of June. The outcome so far is consistent with our baseline assumption that the incentives for Greece and its official creditors to reach agreement are sufficiently strong.

The latest developments reduce, but do not fully relieve, the near-term pressure on Greece's sovereign creditworthiness. The Eurogroup has stated that no disbursements of the outstanding tranche of the current programme, or transfer of profits on Greek sovereign bonds purchased under the Securities Markets Programme, will be made until the Commission, ECB, and IMF conclude the review of the extended arrangement.

This review will take time. The deadline for agreeing a final list of Greek reforms, which may be revised significantly from the list submitted on Monday, is end-April, leaving the ECB with a key role in providing Greece's banks and hence its economy and (indirectly) the sovereign with liquidity. With programme disbursements unforthcoming until then, the Greek government will need additional sources of financing to cover ongoing funding needs. In our view, the most likely source would be an increase in the Treasury bill ceiling (currently binding at EUR15bn). The ECB may take a more favourable stance following the programme extension. Near-term financing remains a key source of risk for the Greek sovereign and banks.

Nevertheless, both the ECB and IMF are clear that Greece's proposals are not exhaustive and note that they do not include full assurances in some key areas of the existing programme, such as pension and VAT reform. This highlights that the road to completing the current review, and receiving the programme disbursements (EUR7.2bn is potentially available if the outstanding review under the current programme is successfully completed), will be a bumpy one.

Strengthened commitments to combatting tax evasion and corruption from the Greek government may create room for compromise in other areas. But while the Greek government has said it will not reverse existing reforms, it may be unwilling or slow to implement policies that up until recently it strongly opposed. Alongside structural reform, any additional tightening in the 2015 budget could remain a sticking point.

Similarly, implementing the programme could have domestic political consequences, if elements of Syriza or its coalition partner start to rebel. A shrinking parliamentary majority and early election before the review is complete therefore remains a risk.

Finally, it is highly unlikely Greece would be able to regain market access before the summer, meaning a replacement programme will probably be needed in advance of the new end-June expiry date.