Greece: First-round Election Result is Credit Positive, Reducing Policy Uncertainty
Sunday’s first-round elections in Greece yielded a very strong result for New Democracy, placing the incumbent party firmly in first place (Figure 1) and making a second round of elections all but inevitable in about a month. In the second round, the largest party could receive up to a 50-seat winner’s bonus, raising the potential for New Democracy to maintain its outright parliamentary majority.
Figure 1. Greece first-round election results, vote share by party
Greece is the only EU sovereign not currently rated investment grade by Scope Ratings. But to recapture its first investment-grade rating since 2010, reform momentum, a prudent fiscal stance and a strengthened relationship with Europe, factors which have underpinned recent credit rating upgrades of Greece, will need to be seen as being sustained longer run.
The country has benefitted from lender-of-last-resort support from the ECB since the Covid-19 crisis via an eligibility waiver for collateral. But continued compliance with European fiscal rules is required to maintain the ECB backstop. Any unexpected return to a more turbulent political backdrop, failure to observe European budgetary rules and backsliding of reforms after the elections could compromise recent progress.
Greece Has Persevered Following a Difficult Decade
Over the past 15 years, the Greek economy suffered a 30% peak-to-trough output drop from 2008-13 enduring sovereign default, market speculation of a euro exit, severe austerity, banking crisis, and, more recently, Covid-induced recession and a cost-of-living crisis. But the country has persevered, adopting ambitious reforms, and significantly raising its investment and economic competitiveness. The conclusion of post-bailout surveillance and associated policy-contingent euro-area debt relief last summer represented another step towards Greece’s normalisation.
Greece’s progress is reflected in the trajectory of its sovereign credit rating. Scope Ratings has upgraded Greece by five rating notches from B- to BB+ since it first publicly rated the sovereign in 2017 (Figure 2), and was the first credit rating agency to elevate Greece to only one notch from investment grade, in September 2021. In December 2022, Scope was also the first credit rating agency to place a Positive Outlook on Greece’s BB+ rating.
Figure 2. Greece sovereign rating, Scope Ratings
Significant Economic Challenges Remain on the Horizon
At the end of 2022, Greece’s quarterly output was lingering 22% below levels from before the global financial crisis – exemplifying the historic economic challenges of the past 15 years. This is even though we upgraded our growth estimate from 1.3% to 2.2% for 2023, followed by 1.4% for 2024 (revised from 2%) – maintaining an expectation of robust recovery from Covid-19 crisis peaks.
Unemployment has more than halved from a peak of 28% and is expected to average 10.9% in 2023 and 2024. Reforms are bolstering trade and foreign direct investment while tourism receipts have rebounded to 94% of pre-pandemic levels in the year to February 2023. Nevertheless, Greece still displays one of the highest rates of relative poverty in the EU. Purchasing-power GDP per capita is the second lowest of the EU (ahead only of Bulgaria).
Capital controls were lifted more than three years ago, and the amount of non-performing loans has fallen from nearly 50% as of June 2017 to 8.2%. This remains meaningfully higher than an EU average of 1.8%, however.
Greek public debt is still elevated, at 171% of GDP at the end of 2022 although below the peak of 206% in 2020. Scope is projecting general government debt to fall to 143% of GDP by 2028 under an optimistic scenario of no significant setbacks to recovery. But in financial markets, the spread on Greek debt to Germany has fallen to about 140bp from 295bp last October; and a record 46bp below that of investment-grade-rated Italy (rated by Scope BBB+/Stable Outlook).
Greece posted a balanced primary fiscal account last year – outperforming most expectations. Nevertheless, uncertainty prevails around whether meaningful primary surpluses of a targeted 2% of GDP a year will be sustained over the coming years, and how robust Greece’s fiscal policy framework will prove under conditions of lighter European fiscal oversight and more substantive market access.
Scope Ratings’ next scheduled rating review date of Greece is 4 August.
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Dennis Shen is a Senior Director in Sovereign and Public Sector ratings at Scope Ratings GmbH.