Virtually as soon as last month’s Greek debt swap deal was done, Fitch Ratings lifted their rating on Greek debt from ‘Restricted Default’ to ‘B-/Stable’. That’s still junk, but a higher class of junk.

Today the ratings firm has released a special report on Greece that outlines the path the country is pretty much forced to take over the next several years. Even though Greece has lowered its indebtedness by €110 billion

Fitch believes that material default risk remains in the light of the still high level of indebtedness post-PSI [private sector involvement] – Greece assumed substantial additional liabilities to fund PSI and recapitalise its banks – and the profound economic challenges that the country faces.

At the end of 2012, Greek debt will total about €326 billion, compared with an estimated pre-swap total of about €356 billion. Official creditors — i.e., governments — will hold about 75% of that debt, compared with just 38% pre-swap. Debt service for official creditors will cost the Greek government €51 billion annually in the years 2012-2014, compared with a pre-swap cost of €112 billion. Private debt holders will claim another €1.2 billion in 2012, eventually rising to €2.2 billion by 2020.

That is surely more manageable, at least in theory. But the Greeks have agreed to make official debt a priority for payment, meaning that if money runs short, they’ll be in the same fix they were in a few months ago, with the only difference being the identity of the creditors.

The country’s debt-to-GDP ratio in 2011 came in a 165% and could rise to 170% in 2013, according to Fitch. After that, the ratio is supposed to drop to 120% by 2020, a guide that Fitch says could be reached “assuming that the economy and the public finances perform according to IMF-EU expectations.” Fitch does not assume these things, and reckons that the best debt/GDP ratio the country can make by 2020 is 130%.

And matters could get worse:

Weak economic performance and incomplete fiscal adjustment will pose the key risks to Greece‟s debt dynamics, resulting in higher debt/GDP outcomes of 140% to 155% by 2020. In a worst case scenario where Greece fails to realise growth and primary surpluses of more than 1% of GDP, no advantage is derived from PSI and the debt/ratio remains stuck at around 170%.

Though Fitch doesn’t say it, the chances of Greece showing any economic growth over the next several years are fairly low. The ECB’s demand that nominal wages fall by double-digit amounts virtually guarantees a no-growth economy in Greece.

That leaves only a possible exit from the Eurozone as a way out for Greece. On that issue, Fitch says, “the agency believes that the costs would far outweigh the benefits, yet the patience of Greece’s eurozone partners is finite.”

The only thing the Greek debt swap really accomplished is to kick the can down the road for another couple of years. Greece will have trouble paying its debt service without an internal devaluation, and those cuts will kill GDP growth. This is not a solution, it’s more of the same problem.

Paul Ausick

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