After the verdict of DBRS late last night, which upgraded the outlook of the Greek debt to positive, the interest of the markets is now turned to the oracle of Moody’s, the only one of the international rating agencies that has not yet given the coveted investment grade to the Greek economy . The American house makes its appointment with Athens next Friday, September 13. It is noted that today it rates Greece Ba1 (non-investment grade) with a stable outlook.
However, expectations are high, as the executive of the international house, Colin Ellis, speaking recently at an Economist conference, opened a window for upgrading the Greek economy to investment grade.
The profit for Greek bonds can reach 20 billion euros
However, there are not a few analysts who believe that the investment community treats Greek assets as if they have already received investment grade. It is recalled that Moody’s is the largest in the world, which is why the potential demand in the event of an upgrade for Greek bonds may now even reach 20 billion euros.
The Greek economy is on S&P’s radar
The assessment of Standard & Poor’s on October 18 is expected with particular interest. The largest house gives positive prospects to the Greek debt and a possible upgrade would be a clear signal to the markets, improving the investment profile of the country as a whole. However, it maintains the rating at BBB-.
Fitch, which assesses the Greek economy with BBB- and a stable outlook, has a series on November 22. The year will end with Scope’s decision on December 6
However, all four upcoming evaluations are expected to have included the new data that will be available. For example, the issue of the Greek GDP estimate will be included as well as the observed fatigue of the government in terms of reforms. Among the biggest challenges for the Greek economy is the large current account deficit. In addition, given the size and importance of sectors such as tourism and shipping, the economy is susceptible to external shocks, which creates issues due to the fact that the eurozone is showing weak growth.
What DBRS said
As it states in its announcement, the trend changes reflect Morningstar DBRS’s expectations for further improvement in the fundamentals of the banking system.
The banking sector is likely to continue to maintain good profitability, reducing non-performing loans (NPLs) and reducing deferred tax credits. Inheritances associated with a strong tie to the government have also receded as a result of the government’s decision to sell a large portion of stakes to systemic banks.
With the health of the banking system improving, the Hellenic Financial Stability Fund proceeded with significant disinvestments in systemic banks
It also states that the upcoming merger between Attica Bank and Pancreta Bank, although it will lead to a public recapitalization of around 500 million euros, will likely help the NPL ratio of the banking system to fall further towards the euro area average.
Financial Stability Fund
With the health of the banking system improving, the Hellenic Financial Stability Fund proceeded with significant disinvestments in systemic banks. This attracted private investors who allowed the government to sell a large part of the shares to systemic banks, which helps reduce the relationship with the banks.
Public debt-to-GDP ratio remains the highest in the euro area, but on a sharp downward trajectory: Favorable structure and prudent debt management mitigate risks
The public debt
Greece’s public debt ratio is expected to continue to decline, benefiting from rising primary surpluses, moderate interest rates and healthy, albeit decelerating, nominal growth. Greece’s debt-to-GDP ratio peaked at 207.0% in 2020 before falling to 161.9% in 2023, the lowest level since 2010. Further declines are likely in the medium term. The government predicts the public debt ratio will continue to decline to 152.7% of GDP this year, marking a drop of around 54 percentage points in just four years, one of the steepest declines in modern times.
In Morningstar DBRS’s view, risks to public debt sustainability are mitigated by several factors.
- First, Greece’s debt structure is very favorable with 100% of the debt at fixed rates after the swaps.
- Second, the weighted average duration is very high, expected to reach 19 years in 2024, and about 70% of the debt is held by the formal sector, which makes the debt less susceptible to market volatility.
- Finally, the Hellenic Public Debt Management Agency (PDM) managed to temporarily cover the debt portfolio, mitigating the effects of the increase in interest costs. In 2024, the average real interest rate on medium- to long-term debt is expected to be 1.3%. These factors bode well for investor confidence and government bond yields continue to benefit from favorable demand, with the 10-year German bond spread slightly above 100 basis points.
Greece’s public debt also benefits from a proactive debt management strategy with early repayments that have reduced short-term debt and smoothed the repayment profile.
The Greek economy will continue to be supported by investments
The Greek economy grew by 2.0% in 2023 thanks to strong growth in private consumption, exports and investment. In 2024, the country’s economic activity will likely continue to outperform the euro area average benefiting from the easing of financing conditions, the expected improvement in the external environment and the flow of EU capital. Real GDP growth is projected to be 2 .2% this year and 2.5% in 2025, according to Bank of Greece estimates. The labor market remains resilient with the unemployment rate falling below 10% in June 2024 for the first time since August 2009, although still above the EU average. Like other small economies, Greece is exposed to geopolitical risks that could adversely affect the tourism and shipping industries or lead to an increase in commodity prices and put upward pressure on prices. The country also remains vulnerable to extreme weather events.
The new medium-term plan
In the coming days, the government will present its medium-term fiscal plan to European authorities for a four-year horizon, and Morningstar DBRS does not foresee a derailment of fiscal prudence. Net primary expenditure targets will likely be in line with the new EU fiscal rules, reflecting the Greek government’s strong commitment to a conservative fiscal strategy. Morningstar DBRS expects the government to maintain a primary surplus of 2.0% of GDP or more over a prolonged challenging period, but Greek authorities are on track to rapidly restore fiscal accounts, despite multiple crises in recent years.
Risks to the fiscal outlook remain and relate to a slowdown in growth that could lead to weaker fiscal revenues, renewed energy and food price pressures that would require additional support measures, climate-related extreme events and contingent liability impacts . On the other hand, the persistent improvement in fiscal revenues thanks to government measures to increase tax compliance may yield better than expected fiscal results. According to the IMF, the share of the shadow economy has fallen significantly to 16% in 2021 from around 30% in 2013, and further declines are likely. This would bode well for fiscal capacity going forward.
The surpluses
In addition, healthy and growing primary surpluses, combined with healthy nominal growth, will facilitate a further significant reduction in public debt to GDP, which is expected to fall below 140% by 2027 from 161.9% in 2023.
The house says the implementation of structural reforms remains on track, which, together with higher investment supported by European Union (EU) funds, is expected to boost GDP potential.
As of 2021, Greece is outperforming the euro area average growth rate and this is likely to continue over the next two years. GDP is expected to expand by more than 2.0% in both 2024 and 2025.
The recovery plan in the Greek economy
The country continues to make progress in implementing the Recovery and Resilience Plan, which is expected to improve the country’s business environment, boost productivity and help narrow the investment gap with its euro area counterparts. Substantial EU resources provide incentives to implement growth-enhancing reforms, while supporting investment with capital also channeled through the strengthened banking system. In addition, there is strong political commitment to maintaining a prudent fiscal strategy, reflected in the rapid improvement in the primary surplus despite the multiple shocks the economy has faced since 2020. Credit ratings are constrained by the still high public debt ratio, the small size of the economy and the persistent current account deficit.
Morningstar DBRS could upgrade the credit ratings if one or a combination of the following occurs: (1) further improvement in the condition of the banking system; (2) continued sound fiscal performance, supported by sustained primary surpluses and a significant reduction in the public debt ratio. or (3) continued implementation of reforms that boost investment, thereby improving long-term growth prospects.
Morningstar DBRS could change the trends in the credit ratings back to stable if the banking sector fails to reduce its vulnerabilities, the projected reduction in the government debt ratio underperforms significantly, or if the improvement in the growth outlook is undermined. Potential triggers for a downgrade include one or a combination of the following: (1) a prolonged weakening of fiscal discipline that puts the public debt ratio on a sustained upward trend; (2) reversal of structural reforms.
Source OT
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