Fitch upgraded yesterday Greece’s Long-term foreign and local currency IDRs to ‘B-‘ from ‘CCC’. The Short-term foreign currency IDR has also been upgraded to ‘B’ from ‘C’ and the Country Ceiling upgraded to ‘B’ from ‘B-‘. The Outlook on the Long-term IDRs is Stable.

The upgrade of Greece’s sovereign ratings by one notch to ‘B-‘ reflects the following factors:

• The Greek economy is rebalancing: clear progress has been made towards eliminating twin fiscal and current account deficits and ‘internal devaluation’ has at last begun to take hold. The price has been high in terms of lost output and rising unemployment and the capacity for recovery is still in doubt. Nonetheless, sovereign debt relief and an easing of fiscal targets have lifted Central Bank measures of economic sentiment to a three-year high and the risk of eurozone exit has receded.

• The Economic Adjustment Program (EAP) is on track amid a semblance of political and social stability. The current administration has displayed much greater ownership than its predecessors, committing to further upfront fiscal consolidation and a renewed push on structural reforms. Still, tangible economic recovery remains elusive, while resistance to reform is high, underlining the continuing risks to implementation.

• Greek primary fiscal adjustment of >9% of GDP in 2009-12 and c16% in cyclically adjusted terms, ranks as the most ambitious instance of fiscal consolidation among advanced economies in recent times. The C/A deficit has also shrunk from 10% of GDP in 2011 to 3% in 2012. The revised EU-IMF program gives Greece two additional years (2015-16) to attain a primary surplus of 4.5% of GDP. This relaxation is reflected in Fitch’s expectation of a milder economic contraction of around 4.3% in 2013 (-6.4% in 2012) and a weak recovery in 2014.

• Structural reforms are progressing. The financial system has stabilised: €16-17bn of time deposits have returned to the system since mid-2012 and bank recapitalisation is well advanced. Meanwhile, a small, but significant milestone was passed earlier this month with the completion of the first major privatisation. Considerable progress has also been made with labour market reforms and 80% of the earlier loss of competitiveness has been clawed back. However, product market reform remains a major challenge: progress in this area will be important to support a sustainable recovery and for the success of the EAP.

• Extensive private and public sovereign debt restructuring has put program funding on a more secure footing and should moderate the rise in the peak public debt/GDP ratio to around 180% in 2013-14. Notwithstanding this still extremely high headline public debt ratio, the significantly reduced interest cost and maturity extension provided by the debt restructuring and EAP financing means that sovereign debt service now appears more secure than the size of the debt stock would otherwise imply. Even so, public debt sustainability is still far from assured and will be dependent on economic recovery and a sustained primary fiscal surplus.

• The degree of default risk for private creditors, encapsulated in the previous ‘CCC’ rating, has subsided. In Fitch’s view, sovereign debt restructuring and debt buy-backs have reduced private creditors’ share of general government debt to the point (15%, excluding T-bills), where there would be little to be gained financially from any further restructuring. Barring Greek exit from the euro, Fitch could envisage official creditors bearing the brunt of any future default, albeit the political considerations of any such move may not be straightforward.