DBRS Confirms Greece’s Rating at B, Stable Trend

DBRS Ratings Limited has confirmed the Hellenic Republic’s long-term foreign and local currency issuer ratings at B. The Republic’s short-term foreign and local currency issuer ratings have also been confirmed at R-4. The trend on all ratings remains Stable.

The confirmation of the rating reflects the material progress which Greece has made in closing its fiscal and current account deficits, counterbalanced by a fragmented political environment that calls into question Greece’s capacity to reduce its large stock of debt to sustainable levels. The country’s favourable debt structure and extensive support received from official creditors underpin our view that additional rounds of private sector involvement are unlikely. Nonetheless, the Government’s slim parliamentary majority and the prospect of early general elections pose risks to the rating. General elections could materialise in the event of the government failing to secure the election of its candidate at the forthcoming presidential election. When considered against a backdrop of ongoing government negotiations with Greece’s official sector creditors with respect to the shape and timing of future financial support for the sovereign and still fragile domestic confidence, Greece remains vulnerable to negative shocks.

The ratings could come under upward pressure if the government makes further progress on fiscal consolidation and the implementation of structural reforms. Further progress on securing additional funding sources, including in the form of debt relief from official sector creditors, would also be positive. Conversely, the ratings could come under downward pressure if political fragmentation coupled with austerity fatigue undermines the continuation of fiscal restraint and the pursuit of structural reforms. Weak fiscal discipline and poor reform implementation could reduce the likelihood of new official financing or official sector involvement and could in an extreme scenario result in Greece failing to meet its debt obligations. Moreover, in the absence of sustained growth, the combination of a high debt ratio and increased reliance on high cost private sector financing could also put downward pressure on the rating.

Greece has benefited significantly from the 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 the Republic benefited since May 2010, a large share of Greece’s public debt is now in the hands of the official sector. Moreover, Greece benefits from a favourable debt maturity (17.2 years on average) structure and modest debt servicing costs, estimated at 2.6% of GDP per annum until 2021.

In addition, the country has made significant progress in rebalancing its economy away from domestic consumption, as demonstrated by the delivery of the first current account surplus (0.7% of GDP) in decades, and the country’s first primary balance (0.8% of GDP) surplus in 11 years.

Finally, the banking sector’s reduced reliance on European Central Bank (ECB) liquidity and the improvement in the banking system’s capital buffers also point to a likely improvement in credit conditions, albeit from very low levels. Over time, the negative effect of bank deleveraging on the wider economy should abate and help provide support for the nascent recovery.

Notwithstanding the progress made to date, the Republic continues to face a variety of material challenges. The country’s debt remains very elevated having reached 174.9% of GDP by end-2013. This means that in spite a favourable debt structure, the reduction of the debt stock over the medium-term will require the favourable confluence of robust growth in nominal GDP, the maintenance of a substantial primary balance and the implementation of other one-off measures to reduce debt, such as privatizations. DBRS sees, however substantial downside risks associated with the assumptions underpinning current fiscal and growth projections because in spite of recent evidence of an economic recovery, Greece’s ability to generate substantial productivity growth could prove weak as a result of domestic constraints or due to an unsupportive external environment.

Moreover, the high unemployment rate, which stood at 25.9% in August 2014 for all age groups and at 49.3% for those aged under 25, is also likely to continue to add to public dissatisfaction and to give rise to austerity fatigue and could result in deviations from the adjustment program in the run-up to the next general election. While Greece has already achieved an unprecedented fiscal consolidation, the combination of an ambitious reform and adjustment program with a deep and prolonged recession, has resulted in increased political fragmentation and uncertainty.

A more immediate concern however, which is exacerbated by the prospects of early elections, relates to the absence of an agreed strategy for Greece to close the financing gap identified for 2015-16. The government’s expressed wish to exit the programme early and forgo additional IMF disbursements, by tapping the sovereign bond markets raises questions as to whether Greece will be able to fund itself at yields compatible with debt reduction. A gradual return to the sovereign bond markets is likely to be credit positive for Greece, to the extent that it helps the Republic to re-build its track record of market access. However, particularly in light of recent market volatility, we view a troika program or precautionary arrangement as a useful back-stop.

All figures are in euro (EUR) unless otherwise noted.
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.

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
Initial Rating Date: 16 August 2013
Rating Committee Chair: Roger Lister
Most Recent Rating Update: 11 July 2014

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