As long as Greece continues its economic policies and commitment to fiscal consolidation, while successfully implementing the remaining reforms, there could possibly be an upgrade from Moody’s, he estimates in his interview with “Step” The Colin Ellisits Global Credit Strategist Moody’s Investor Service.
According to the credit strategist, a higher rating could be supported by faster-than-expected improvements in the country’s fiscal strength and more reduction in Non-performing loans (NPLs). The Moody’s official also warns that downward pressure on Greece’s rating could arise if the policy path seen in recent years is reversed, or if there were signs that past reforms are not delivering the boost to growth and fiscal accounts expected towards present, but also possibly in the event of an escalation of the geopolitical situation in Europe with the participation of NATO.
While Greece has made significant progress over the past decade, the debt-to-GDP ratio will remain high for many years
On investment, he acknowledges the government’s investment-friendly policies, but notes that the Greek economy continues to be less diversified, relying heavily on tourism and shipping. He estimates that strengthening economic resilience will take time, while highlighting as risks the high debt-GDP ratio, which will remain high for several years, as well as demographic developments.
What would Moody’s need to see to make the decision to upgrade Greece at the next scheduled rating in September?
“It is important to note that we do not pre-empt or pre-determine rating decisions. Each evaluation committee makes its own evaluation at the appropriate time. However, we list the following factors that could lead to an upgrade. Upward pressure could emerge under a scenario of continuation of economic policies and commitment to fiscal consolidation combined with successful implementation of remaining reforms.
Faster-than-expected improvements in fiscal strength and more NPL reduction would support a higher rating. In addition, a more rapid change in Greece’s economic structure, helping to improve economic resilience, would be credit positive. Further improvements in the banking sector, reducing profitability volatility and bringing asset quality and capitalization ratios closer to the Eurozone average, would also be credit positive.”
What do you think are the consequences of the recent decision not to upgrade Greece?
“We believe the rating is appropriately positioned and the stable outlook reflects our assessment of the balance of risks. While Greece has made significant progress over the past decade, the debt-to-GDP ratio will remain high for many years. Substantial EU funds together with private investment will support growth in the coming years and, together with ongoing reforms, will help raise potential growth and offset to some extent the negative impact of adverse demographics.”
In your opinion, what are the most important challenges and difficulties facing the Greek economy and in which areas do you think there is a need for progress, but also downside risks?
“We believe that downward pressures on Greece’s rating could arise if the policy path seen in recent years is reversed or if there were signs that past reforms are not delivering the boost to growth and fiscal accounts that is currently expected. In particular, signs of a sustained, material deterioration in the fiscal position, possibly coupled with a sharp deterioration in the health of the banking sector, could trigger negative rating action. An escalation of the geopolitical situation in Europe involving NATO could likely lead to downward pressure on the rating.”
How would you assess the interest of foreign investors to invest in Greece and how do you see them investing in “traditional” sectors, such as tourism, or are they also interested in new sectors?
“The current government has begun to address some of the structural challenges facing Greece, particularly those related to low investment. These actions include reducing Greece’s high tax rates, relaxing business regulations, improving the investment licensing framework and promoting privatization. The Greek economy continues to show relatively lower economic diversification compared to similar economies. Given the size and importance of sectors such as tourism and shipping, the economy is sensitive to external shocks and further improvements in economic resilience by expanding the export base will take time.”
I would also like to ask a question about the European economy, which has lost its momentum. What sources of concern do you see and what challenges do you think there might be, especially if we take into account the additional spending needs of European countries, such as in defence?
“While economic growth in Europe slowed in 2023, we expect growth to pick up a bit in 2024 and strengthen further in 2025. Governments worldwide continue to face competing spending priorities, while often still running deficits this year. In Europe, many governments are under pressure to spend more on defense, especially after Russia’s invasion of Ukraine. Without action on policies to raise tax revenue or cut spending elsewhere, or a combination of both, simply meeting NATO’s 2% target on a sustained basis by 2030 will strain the fiscal strength of France, Italy, Germany and Poland, for example”.
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