Greece: Positive Rating Outlook Yet Material Challenges Remain

Dennis Shen
Published: Feb 24, 2023, 10:18 UTC

Scope Ratings’ upgrade of Greece’s Outlook to Positive implies at least a one-in-three probability of an investment-grade rating within 18 months. How will challenging conditions play into prospects?

Greece, FX Empire

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Scope rates Greece BB+, one notch below investment grade but we raised our Outlook from Stable to Positive in December 2022. The assignment of a Positive Outlook was underpinned by a series of factors, notwithstanding significant economic challenges still remain.

While significant progress has been made, a series of challenges remain: moderate medium-run growth of about 1%, above-EU-average unemployment at 11.6%, limited economic diversification, a rigid labour market, external-sector vulnerabilities, and still-elevated non-performing loans in the banking sector. Parliamentary elections by July raise political uncertainties as well, as any post-election pivot of economic policies could raise financial risks.

We Assume Economic Slowdown But No Recession In The Greek Economy

As for economic fundamentals, we see growth slowing to 1.3% this year before rebounding to an above-potential 2.0% next year and averaging 1.4% over 2025-27. Scope does not expect a recession this year. The current economic slowdown follows strong recovery since the pandemic crisis: 8.4% growth in 2021 and an estimated 4.9% last year, outperforming euro-area averages (Figure 1).

Figure 1. Real economic growth (%), 2020-24F

Source: Eurostat, Hellenic Statistical Authority, Scope Ratings forecasts

HICP inflation is expected to gradually ease from an exceptionally elevated 9.3% YoY last year to 3.9% in 2023 and 2.8% next year. An anticipated pause in ECB rate hikes at a terminal (deposit) rate of at least 3% by the summer of this year will deliver much-needed relief for regional markets and economies.

But even as short-end policy rates continue rising over coming months, 10-year bond yields have eased – to 4.3%, representing a spread to Bunds of 182bp. This represents a sizeable discount from peaks of 5.1% and 295bp as of last autumn.

Strengthened European Support Supports Ratings if Sustained After the Elections

Significantly strengthened European institutional support for Greece since the Covid-19 crisis, which underpinned originally Scope’s upgrade to BB+, will be credit positive if it is maintained beyond this year’s elections. European monetary and fiscal policy tools strengthen debt sustainability of especially vulnerable borrowers such as Greece via central-bank asset purchases and the re-investment of redemptions, relaxed collateral requirements and NextGeneration EU disbursements.

The ECB’s enhanced policy framework since the Covid-19 crisis and waivers granting Greece access to Eurosystem facilities anchor a degree of further convergence of the credit-risk profile of the sovereign with that of other euro-area Member States. As long as Greece stays compliant with EU rules, we assume the ECB will deliver a backstop for Greek sovereign bonds, demonstrating its continued support for Greece even as Covid-19 crisis conditions fade.

EU fiscal programmes have strengthened. The Recovery and Resilience Facility represents a meaningful step in the direction of greater fiscal integration, disproportionately aiding the most-indebted EU borrowers like Greece. A strong emphasis in Scope’s credit ratings on European institutional support reflects a core difference of its sovereign-rating approach against that of other rating agencies.

A Steady Decline in Public Debt in Progress

Our positive rating outlook for Greece is further driven by a decline in public debt. A baseline debt-sustainability analysis envisions debt-to-GDP falling from 171% in 2022 to 164.5% in 2023 and 150.5% by 2027. This comes after peaks of 206.3% in 2020. High inflation contributes to reduced debt ratios but inflation might also prove a primary obstacle to Greece’s path to investment grade if borrowing rates were to rise again.

Figure 2. General government debt and interest payments

Source: IMF, Eurostat, Scope Ratings forecasts

Higher Borrowing Rates and a Weakening Profile of Government Debt Are Credit Constraints

Because of higher borrowing rates, net interest payments as a proportion of general government revenues are set to increase from 5% of general government revenue in 2021 to 8.9% by 2027 even as Greece’s debt ratio drops (Figure 2). This is a constraint for further upside to Greece’s ratings. Even as long-run debt sustainability is aided by a declining debt ratio, short to medium-run debt sustainability weakens as outstanding concessional loans from its European official-sector lenders – mostly the European Stability Mechanism and European Financial Stability Facility – are gradually replaced by more expensive market financing.

The ECB’s transition to quantitative tightening will shift debt held by the Eurosystem back to private-sector balance sheets. As sovereign ratings are assigned on a sovereign’s privately-held debt, quantitative tightening is credit negative by expanding the stock of rateable privately-held securities.

We expect primary budget surpluses of 1% of GDP from 2024-2027, slightly more conservative than the government’s 2% assumption. Maintaining prudent primary surpluses after conclusion of the Enhanced Surveillance programme and after 2023 elections is crucial for Greece regaining an investment-grade status.

Scope Ratings has two scheduled calendar review dates of Greece’s sovereign ratings this year – 3 March and 4 August 2023.

For a look at all of today’s economic events, check out our economic calendar.

Dennis Shen is a Director in Sovereign and Public Sector ratings at Scope Ratings GmbH. Keith Mullin, Senior Editor at Scope, contributed to writing this commentary.

About the Author

Dennis Shencontributor

Dennis Shen is an American economist and a Senior Director in sovereign ratings with Scope Ratings based in Berlin, Germany. At Scope, he serves furthermore as Chair of the Macroeconomic Council.

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