The rating agency did not upgrade Greece, as the government had fervently expected, and points to five major weaknesses in the economy that could lead to a new collapse…
Moody’s announcement that it is leaving Greece’s debt rating unchanged at Ba1, one step below investment grade, was not a bolt from the blue. Moody’s had last upgraded Greece in mid-September 2023 and had since then given a stable outlook, which means it did not foresee an upgrade move for the country. He did the same on March 15, which means that he does not intend to upgrade Greece in the foreseeable future.
But for the Mitsotakis government, which for four years played the card of the investment grade, the event was an unexpected coolness. Having secured investment grade from the other credit rating agencies (Scope, DBRS, S&P and Fitch) through 2023, the government has been eagerly awaiting Moody’s seal of approval to confirm the narrative of “successful economic governance”. It was expected that this latest upgrade of the Greek economy would provide the critical impetus for the Athens Stock Exchange’s transition to developed markets.
This target is of interest to both the government and large listed companies as they look to further capital inflows into Greek bonds and the stock market. Instead, on March 19 came JPMorgan’s report that the Greek stock market is too shallow to rejoin the developed markets – and it spelled doom for the economic narrative of the Mitsotakis government.
Double coolness!
Despite this double coolness, no official of the Mitsotakis government made any official announcements on the reports of either Moody’s or JP Morgan. Later in the week, the Ministry of National Economy, through sources, leaked to the pro-government media some comments that focused on what, according to Moody’s, the ND government had done right. And this in disregard of the spirit of the report, which sent a clear message of mistrust towards Greece, even making explicit reference to the PSI shock and underlining that “the 2012 debt restructuring still weighs on the country’s credit rating”.
The mistrust of Moody’s towards Greece arises partly historically, as before the debt crisis of 2010 the specific house was particularly favorable to our country by giving it A ratings early on and found itself exposed when the restructuring of the Greek public debt took place – it is even called that he fired the analyst who was giving high ratings on Greece. However, it is directly related to the structural problems of the Greek economy, which the house highlights one by one, stressing that they remain a significant threat to the Greek economy, while for the first time it touches on the problem of unfavorable demographic data – noting that they will act as a weight in development.
Essentially the position that Moody’s puts out in its report is: Greece, the one and only country in the eurozone that has defaulted once and is burdened with the highest public debt, is in a precarious position and some small improvements in the numbers or some reforms are not enough mandated by the current neoliberal orthodoxy; it must be proven that these reforms have a permanent and stable effect in terms of improving debt and public finance indicators, because the Greek economy suffers from serious imbalances, is extremely vulnerable to external shocks and at any time it can derail again.
The five vulnerabilities
Moody’s acknowledges that the Greek government has made the key improvements needed after the pandemic fiscal easing in terms of public deficit and debt figures, consolidation of the banking system and increased investment. However, he notes that there are still major weaknesses, which he codes in the following points:
01 High public debt
The ratio of public debt to GDP remains very high. Although it fell from 172.6% of GDP in 2022 to 161% of GDP at the end of 2023, and according to the house’s forecasts it may fall further to 148% of GDP by the end of 2025, the debt-to-GDP ratio remains dangerous high. Worse still, despite the indeed large improvement in the debt-to-GDP ratio achieved over the past three years due to high inflation, which has increased nominal GDP entering the numerator compared to the denominator, in absolute terms the debt has not be limited at all. On the contrary, in 2023 the gross public debt of the country, instead of decreasing by 5.25 billion euros, as predicted by the Ministry of Finance, increased again by 6.25 billion euros and reached 406 billion euros, which is a new historical high.
Of course, Moody’s adds, this unthinkable public debt is mitigated as a problem for Greece today, because there is a capital cushion in the Greek government and because the debt is regulated with low interest rates and long-term maturities. But it can be a problem, as is known, after 2032, when the debt will increase further because deferred interest from European loans of up to 25 billion euros will be included in it and the cost of its refinancing will increase. There, a wrong turn can easily throw Greece out of the markets again.
02 Large external deficit
The Greek economy is burdened by serious structural weaknesses because it has a large external deficit and a high dependence on only two sources of wealth, tourism and shipping. Moody’s notes as a positive development the fact that the reduction in energy prices and the record tourist revenues of 2023 led to a reduction of the country’s external deficit from the unthinkable levels of 10.3% of GDP where it had reached in 2022 to 6.4 % of GDP in 2023, which, however, as he notes, is still very high.
The high external deficit is because the balance of goods (excluding fuel and ships) was still in sharp deficit in 2023 because the country is import-dependent and has an output deficit. The high external deficit and heavy reliance on tourism and shipping, as Moody’s warns, mean the country is vulnerable to external shocks, such as the great financial crisis of 2008 that led to the Greek default.
In order to overcome this problem, the structure of the Greek economy must change, adds Moody’s, there must be improvements in production and exports – that is, a change in the economic model – but these processes take time, concludes the house. And a big problem for Greek society is that until there is a change in the economic model, if there is one, the only way to reduce trade deficits, when the need arises, is to reduce labor costs, i.e. to freeze wages.
03 Banks on the ventilator
Greek banks, despite being cleared of “red” loans, still have low capital adequacy ratios compared to the European average and most of their capital still consists of deferred tax, i.e. “air”. According to Moody’s, the weakness, as long as it remains, can create new problems if there are serious pressures on the Greek economy and loans go “red” again.
04 Delays in Justice
The Greek institutions still have serious weaknesses and delays in the delivery of justice remain a major problem, notes Moody’s. Indeed, according to an AlphaBank study published in September 2023, Greece is one of the lowest performing European countries in the justice sector, with a relatively low case resolution rate, below the corresponding EU average (82.4 %, against 100%) and the worst justice delivery time of all other European countries. In fact, the delays in the Greek Justice system are constantly worsening instead of improving and the time required to resolve civil and commercial disputes in the first instance in Greece has increased from 330 days in 2014 to 559 days in 2018 and to 728 days in 2021.
Moody’s, like other financial institutions, insists on the problem of delays in the administration of justice because they act as a major deterrent to attracting foreign direct investment.
05 Unfavorable demographics
The development prospects of the Greek economy are undermined by the unfavorable demographic data. Moody’s notes that Greece’s growth, which in 2023 was limited to 2% under the pressure of high inflation and high interest rates, which burdened consumption and investment respectively, is supported by European Recovery Fund funds and investments, but it is burdened by the unfavorable demographics of the country.
These unfavorable demographics that act as a drag on growth are the reduction of its population (by 3.1% in the last decade) and its labor force (by 7.2% in the last 14 years) due to the flight of hundreds of thousands – it is estimated that between 320,000 and 700,000 left in the decade of the crisis, depending on the sources – Greek and foreign workers aged 20 to 40 abroad, among them highly skilled people.
Since the exodus involved people of childbearing age, the effect was to further reduce the already low domestic birth rate.
Based on UN and EU demographic projections, this trend leads to a dramatic shrinking of Greece’s population, up to 8.5 million by 2050, as well as its workforce, which in turn implies a limitation of growth potential of the economy. Unfavorable demographic data – for the first time recorded as a burden on Greece’s development by a credit rating agency – is perhaps the biggest problem of the Greek economy today, which is impossible to solve with the development model of the Greek economy favored by the Mitsotakis government: construction and tourism, cheap development, cheap labor, low corporate tax rates, that’s a Third World recipe.
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