In a surprise move, Moody’s has upgraded Greece’s credit rating by two notches, from B3 to Caa2, while retaining the positive outlook.

“Greece has made significant progress with its fiscal and institutional reforms, and its economic growth prospects have improved. While its euro area creditors remain committed to providing financial support, if needed, these improvements will allow Greece to successfully exit its third support program and resume market-based funding for the first time since 2010. The risk of Greece defaulting has therefore declined materially,” the rating agency said.

Moody’s said that Greece is expected to maintain over the coming years its improved fiscal and institutional performance, and that this will support the recovery of the economy and of the banking system.

The credit rating agency projected that Greece will successfully complete its fiscal adjustment programme and return to the markets for funding.

The “clean exit” will be supported in the short term by a significant liquidity cushion, and in the medium-term by eurozone creditors, who are expected to offer additional debt relief.

Another factor cited in explaining the upgrade is that the risk of default and of a restructuring of debt in the hands of private sector investors has been significantly reduced.

While Greece was at a similar turning point in the middle of 2014, Moody’s indicated that the risk of a reversal or derailment of the country’s fiscal and economic progress is significantly lower.

Positive outlook

The positive outlook means that Moody’s may further upgrade Greece’s credit rating, if the reforms that have been completed lead to a better than projected outcome, in turn producing sustainable economic development, and a larger reduction of the public debt, all within the framework of a stable political environment.

The credit ceiling for Greek bonds was also increased, from B3 to Ba2, which reflected the reduced risk of a Greek exit from the eurozone.

At the same time, the credit ceiling for deposits was raised from Caa2 to B3.