DBRS Upgrades Greece to B, Trend to Stable from Negative

DBRS Ratings Limited (DBRS) has upgraded the Hellenic Republic’s long-term foreign and local currency issuer ratings to B from CCC (high). The short-term foreign and local currency issuer ratings have been upgraded to R-4 from R-5. The trend on the long-term foreign and local currency ratings has been revised to Stable from Negative, and the trend on the short-term foreign and local currency ratings remains Stable.

The upgrade reflects DBRS’ view that the risk of Greece leaving the euro area and of further rounds of restructurings of privately-held debt has declined. In addition, Greece’s progress in meeting the fiscal targets under the economic and financial adjustment programme points to the likely continuation of support from the euro area creditors. The slowdown in the pace of economic contraction and the expectation that GDP will start to grow again this year will help support Greece’s debt reduction efforts. Banks’ reduced reliance on ECB liquidity and the improvement in the banking system’s capital buffers, as well as the stabilization of the deposit base, also point to an improvement in financial conditions, albeit from very low levels. Moreover, contingent on Greece’s progress on the fiscal and structural reforms front over the next 12 months, a restructuring of the officially-held loans in the run-up to the next general election could also support growth, debt sustainability, and put upward pressure on the rating.

The Stable trend reflects DBRS’ view that financial support from Eurozone partners and signs of macroeconomic stabilization are balanced against several factors that continue to materially constrain the ratings. These include: (1) Greece’s elevated level of public sector debt; (2) the need to implement additional sizeable fiscal consolidation to keep the debt on a downward trajectory; (3) the weak performance of exports of goods despite the sharp drop in unit labour costs; (4) the high levels of non-performing loans; and (5) the country’s extremely high unemployment rate, which combined with austerity fatigue could undermine support for the adjustment program.

Factors which could put the rating under downward pressure include the recourse to Private Sector Involvement (PSI) as a means to reduce Greece’s funding needs over 2015-16 or the loss of the primary surplus due to a sluggish recovery or poor policy implementation as a result of the waning of political support for the program.

Conversely, factors which could put upward pressure on the rating over the next few months include the provision of additional support by the euro area creditors and continued access to the sovereign bond markets at affordable yields which would allow Greece to close the financing gap in 2015-16 without involving any form of PSI. Swifter progress on the implementation of reforms to make product markets more flexible and improve competitiveness would also put upward pressure on the rating. Finally, the resolution of the high level of non-performing loans (NPLs), which should support the gradual increase in the amount of credit flowing to the real economy, could also result in an improved economic outlook for Greece and help bring about further improvements in the ratings.

Greece has benefited significantly from euro area-level policies adopted to boost the support mechanisms available for countries experiencing financing difficulties. As a result of the two assistance programs from which Greece benefited since May 2010, a large share (81.2% at end 2013) of Greece’s public debt is now in the hands of the official sector. With such a high share of its stock of debt held by the official sector, Greece thus benefits from a favourable debt maturity (15.8 years on average) and benign financing terms (2.4% effective interest rate in 2013). In addition, the November 2012 decision by the Eurogroup to grant Greece a maturity extension on its EFSF and Greek Loan Facility (GLF) borrowing and to reduce by 100 basis points the interest rates paid on the GLF loans has contributed to a lowering of the debt servicing burden through the mid-2020s. In addition, the Greek banking sector has benefited from the EUR49.7bn backstop facility managed by the Hellenic Financial Stability Fund (HFSF). Following the publication of the results of the EU-wide banking sector stress tests later in the year, the Government will be in a position to determine how much, if any of the funds remaining in the HFSF could be mobilized towards helping Greece close its financing gap.

Greece has made significant progress in rebalancing its economy as reflected in the delivery of the first current account surplus in over 60 years and the first primary balance in 11 years. Following a decade of heavy external private and public sector borrowing which resulted in the country’s Net International Investment Position (NIIP) deteriorating from 40% of GDP in 2000 to 119% of GDP in 2013, Greece’s current account deficit reached its first surplus (at 0.7% of GDP) since 1948. Moreover, the primary balance reached a surplus, albeit a modest one at 0.8% of GDP.

Greece has also adopted a number of reforms meant to lift some of the rigidities that have long characterized the Greek economy and which have likely depressed potential growth. Going forward, the government has signaled its commitment to implementing a further large number of the product market reforms identified by a recent OECD study in the areas of food processing, tourism, building materials, and retail. These concrete measures aim to liberalise the transport and rental markets, open up closed professions, and reduce social security contribution rates.

However, areas of marked weakness and vulnerability remain that reflect both Greece’s economic model pre-crisis and the effects of the sovereign debt on the country’s economy. The government’s still very elevated level of public sector debt is likely to weigh negatively on investor sentiment. Moreover, non-tourism exports have underperformed relative to Greece’s peers in spite of the sharp decline in unit labour costs. Banks face a large stock of NPLs which needs to be adequately resolved to support credit availability, investment and growth. Fiscal gaps are currently projected for 2015-16 and the debt to GDP ratio remains very elevated at over 175% of GDP. Structural reforms in the labour market have also been slow to implement and product markets remain heavily regulated. Improvements in tax administration are also likely to be required to help meet the fiscal targets.

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

The main points discussed during the rating committee were: (1) Greece’s progress on the fiscal and external fronts and on structural reforms; (2) the economic outlook for the country; (3) the country’s financing gap and whether closing that financing gap is likely to entail Private Sector Involvement (PSI) in a future debt restructuring; and (4) the prospects for public debt sustainability and the potential for Official Sector Involvement (OSI) in a future debt restructuring, to reduce the debt overhang over the medium-term. Other issues discussed included: the state of the country’s banking sector and the political risks.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS 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. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

These can be found on www.dbrs.com at:
http://www.dbrs.com/about/methodologies

The sources of information used for this rating include IMF, OECD, BIS, European Commission, European Central Bank, Statistical Office of the European Communities, and Hellenic Republic Finance Ministry, Bank of Greece and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

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 outlooks and ratings are under regular surveillance.

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

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.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Carla Clifton
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 13 August 2013
Most Recent Rating Update: 13 August 2013

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