DBRS Assigns CCC (high) Rating to Greece, Negative Trend

DBRS, Inc. (DBRS) has today assigned long-term foreign and local currency issuer ratings for Greece at CCC (High) with a Negative trend, and short-term foreign and local currency issuer ratings at R-5 with a Stable trend.

Greece’s ratings are underpinned by the unprecedented amount of financial support the country received from its Euro area partners which has had a highly beneficial effect on its cost of funding, the maturity structure of its debt and on roll-over risk. Additional factors supporting the rating include the progress which Greece has made in reducing fiscal and external imbalances built up in the run up to the financial and sovereign debt crisis. Moreover, Greece’s ratings are further supported by the completion of the restructuring and recapitalization of the country’s banking system and by the structural reforms carried out to date.

Greece’s creditworthiness is, however, impaired by its extremely high government debt to GDP ratio, which is likely to weigh on growth and the country’s ability to reduce its stock of public debt. In addition, the nascent nature of the fiscal and external rebalancing constrains the ratings, as does the country’s high unemployment rate. The Negative trend reflects the possibility that additional official sector funding to cover the EUR11billion funding gap identified for the 2014-2015 period could be made conditional on further restructurings of privately held debt. Also driving the Negative trend is Greece’s still vulnerable economic landscape which, coupled with the need to press on with structural reforms and fiscal adjustment, could lead to a resurgence of political and social instability and reignite the risk of a Greek exit from the Euro area.

Going forward, DBRS would change the trends on the long term ratings from Negative to Stable if the creditor countries adopted measures to materially reduce the country’s stock of debt, thus fostering a more growth-conducive macroeconomic landscape. Conversely, Greece’s ratings could be lowered if the country failed to meet key performance criteria associated with the assistance programme, thus hindering the sovereign’s ability to meet its obligations and reducing the likelihood of a restructuring of officially held debt in the near future.

DBRS takes comfort in the reduction of the deficit from 10.8% of GDP in 2010 to 6.3% in 2012 (net of the operations to recapitalize the country’s banks), and in the reduction of the primary deficit from 4.9% of GDP in 2010 to 1.3% of GDP in 2012. However, DBRS notes that the fiscal slippages which have occurred so far in 2013 and the large fiscal adjustments required to improve the primary balance to 4.0% of GDP on a permanent basis, continue to warrant some concern.

Greece’s external balances have also been wound down with the current account deficit declining from an average of 12% of GDP over the 2006 to 2011 period, to 3.1% of GDP in 2012. Moreover, Greece’s unit labour costs have adjusted between 2009 and 2012, aided by decentralized wage bargaining and reductions in the national minimum wage. However, improvements in unit labour costs have yet to translate into commensurate reductions in relative price inflation and in widespread improvements in competitiveness. Furthermore, growth in exports has remained elusive, and the improvement in the current account resulted almost exclusively from the sharp fall in imports, associated with the contractions in investment and household consumption. The impact of one-offs, such as the reduction in interest payments abroad, which resulted from the private sector involvement (PSI) in the debt restructuring of March 2012, also contributed to the correction in the current account.

DBRS further believes that the completion of the recapitalization of the country’s four largest banks, coupled with the increase in deposits by domestic residents and with the lower reliance by financial institutions on central bank liquidity, are also credit positive.

Under the assumptions of the assistance programme, the Greek economy is expected to start growing in 2014, albeit by only 0.6% per annum, after a contraction of 4.2% in 2013. The recovery is expected to be driven predominantly by a sustained rebound in investment and net exports. However, DBRS believes that investment is likely to be hampered by investors’ concerns over the prospects for domestic growth, against a backdrop of high public sector debt and the nascent recovery in the Euro area. Weak foreign direct investment due to slower than anticipated progress on privatizations is also likely to put downward pressure on investment.

Greek unemployment reached 27.6% of the labour force in May whilst youth unemployment increased to 64.9%. A return to growth is paramount to arrest a further deterioration in the labour market, to halt the erosion of the country’s stock of human capital, and to lower the number of jobless to a level compatible with social cohesion and political stability.

Greece’s public debt is expected to reach 176% of GDP in 2013 before declining to close to 160% of GDP by 2016 and 124% of GDP by 2020. However, DBRS questions whether Greece can sustain such a high debt burden, even if it is in decline, for such a long period. Even under a more benign growth scenario, the European Commission expects that the debt ratio will remain at around 140% of GDP by 2018. DBRS thus sees the restructuring of official holdings of Greek debt, which would help put the debt ratio on a more sustainable path, as a possibility.

Notes:
All figures are in Euros (EUR) unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on our website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales.

The sources of information used for this rating include the Ministry of Finance, Bank of Greece, ELSTAT, European Central Bank, European Commission, Eurostat, IMF, OECD, BIS and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.
This rating is endorsed by DBRS Ratings Limited for use in the European Union.

For further information on DBRS’ historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository see http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period while reviews are generally resolved within 90 days. DBRS’s trends and ratings are under constant surveillance.

Lead Analyst: Fergus McCormick
Rating Committee Chair: Alan G. Reid
Initial Rating Date: August 16, 2013
Most Recent Rating Update: August 16, 2013

For additional information on this rating, please refer to the linking document under Related Research.