By Harry Papachristou
ATHENS (Reuters) - Rating agency Moody's raised Greece's sovereign rating to 'Caa3' from 'C' on Friday, saying it expected the debt-laden nation to meet its 2014 budget targets and that its recession will end next year.
Moody's is the third and last major agency to raise Greece's rating over the past 12 months, after the election victory of a government backing the country's EU/IMF bailout, which rescued Athens from default and averted its possible exit from the euro.
S&P raised Greece's rating in December 2012 to 'B-' from "selective default." Fitch raised it in May 2013 to 'B-' from 'CCC'.
Greece, however, is still rated "junk," reflecting its high debt level, currently at about 175 percent of the country's gross domestic product.
But Moody's said late on Friday it believed Athens would meet its 2014 budget surplus target, which would make it eligible for debt relief from its international lenders.
"Moody's believes that the government remains committed to achieving a primary surplus of close to 1.5 percent of GDP in 2014, especially as this will be required to qualify for continuing debt reduction from official creditors," it said in a statement.
Achieving a primary surplus, before interest payments, is a condition that Athens must fulfill to obtain debt relief promised to it by its lenders under the terms of a November 2012 deal.
The European Union and the International Monetary Fund have so far extended about 216 billion euros ($294 billion) of bailout loans to Greece over the past three years. Including the amount of Greek bonds purchased by the European Central Bank, the three institutions are currently holding about 80 percent of its debt.
On top of its bailout money, Athens has already obtained debt relief worth about 170 billion euros by imposing losses on private bondholders and getting interest rate reductions and loan maturity extensions on its rescue loans.
Following that debt relief, Greece's annual interest payments fell to around 4 percent of its GDP, "consistent with other countries in the euro area," Moody's said. Greece's debt-maturity profile has also been lengthened to around 17 years in 2013, from around 6.5 years in 2011, the agency added.
But it will require years of surplus budgets, robust economic growth and further debt relief from lenders to make Greek debt sustainable, with creditors expecting it to fall to 124 percent of GDP in 2020 and well below 110 percent in 2022.
"Greece's substantial debt stock... continues to weigh on its solvency," Moody's said, adding that its "overall reduction will be gradual and will remain susceptible to nominal growth shocks and policy implementation risks."
Moody's also said on Friday it believed that the Greek economy was bottoming out after six years of austerity-fuelled recession.
The agency expects Greece's economy, which has contracted by about a quarter in 2008-2013 under the strains of creditor-imposed austerity, to shrink by a further 0.5 percent in 2014 but expand by 1.0 percent in 2015.
"The combination of cyclical factors and the implementation of structural reforms are leading to a gradual improvement in medium-term growth prospects," Moody's said, adding that the outlook on Greece's 'Caa3' rating was "stable."
The rating, however, remained at low levels to reflect the country's virulent politics, its challenging debt negotiations with lenders and the subsequent risks to Greece's "few remaining" private-sector creditors, Moody's said.
Earlier on Friday, EU/IMF inspectors postponed a planned visit to the country, a move that marks a new low in relations between the parties and could delay aid payments to Athens.
Private investors hold just about 30 billion euros of Greek bonds. U.S. investment firm Japonica Partners, one of the biggest Greek bond investors, put out an ad in newspapers earlier this week, arguing that Athens deserved an 'A+' rating.
($1 = 0.7345 euros)
(Reporting by Harry Papachristou; Editing by Lisa Shumaker)