DBRS Upgrades Hellenic Republic to CCC (High)

DBRS, Inc. has upgraded the Hellenic Republic’s long-term foreign and local currency issuer ratings to CCC (high) from CC and confirmed the short-term foreign and local currency issuer ratings at R-5. The ratings are no longer Under Review, and the trend on all of the ratings is Stable.

The upgrade and Stable trend reflect DBRS’ view that the current financial support program by the institutions (the European Commission, European Central Bank, European Stability Mechanism, and International Monetary Fund), is resulting in the stabilization of the economy and the banking sector. The July 2015 agreement between the Greek authorities and the institutions on a three-year €86 billion Third Adjustment Program eased the acute liquidity squeeze and removed the imminent threat of a departure of Greece from the Eurozone and a subsequent debt default. The Greek parliament has approved several rounds of fiscal and structural measures, while the Greek banks have undergone a comprehensive assessment of their capital needs by the ECB and have completed a recapitalization exercise. This paved the way for the ESM to release finances to the Greek government and the Hellenic Financial Stability Fund for bank recapitalization and resolution.

However, the recent economic downturn, the uncertainty surrounding capital controls and high level of non-performing loans in the banking sector, and the need for ongoing passage and implementation of fiscal and structural measures by a fragile coalition, have the potential to destabilize the newly achieved macroeconomic stability. Under these conditions, DBRS is of the view that Greece’s debt burden is unsustainable, and a permanent reduction of the debt burden is likely necessary to create the conditions for macroeconomic stability.

Indeed, without access to international markets, Greece’s dependence on a program is high. This is because in the absence of significant debt relief, a high primary surplus is needed in a context of sustainable growth and inflation for Greece to service its debt.

Triggers to further upgrades include compliance with fiscal, structural and financial adjustments under the support program that places the public debt on a firm downward path would add to upward pressure on the ratings. Reducing non-performing loans and further easing capital controls would help ease financing constraints and raise growth prospects. A rescheduling of official sector loans, most likely through an extension of maturities and a reduction in interest rates, that reduces Greece’s refinancing needs over the coming years would also put upward pressure on the ratings.

Downward pressure on the ratings could result if there is significant fiscal slippage from the program targets, non-compliance with structural benchmarks, or financial measures. The ratings could also come under downward pressure if the debt is not rescheduled.

Greece’s credit strengths include the benefits that the country has enjoyed from Eurozone membership and access to support finance from the institutions. The country has enacted a very large fiscal adjustment, and has made progress in reforming its economy in areas such as the labor market and improvements in the tax code and public administration. Economic and trade linkages with Europe have led to rising per capita income, in spite of the significant setbacks of the past decade.

However, the challenges Greece is facing in terms of returning to sustainable growth, restoring financial stability, consolidating public finances, servicing its debt payments, and negotiating debt restructuring, all under a fragile coalition government, far outweigh the strengths. After returning to growth in the fourth quarter of 2014, growth stagnated and turned negative in the third quarter of 2015. Growth is projected to regain some momentum in the second half of 2016 as structural reforms take hold and boost exports and investment. However, inflation remains low due to low economic activity, and unemployment is likely to decline only gradually.

Since the September 2015 elections the political environment has improved but remains fragile. Ongoing economic improvements depend entirely on cooperation between the Greek authorities and the institutions. As long as Greece continues to approve and implement ongoing tough fiscal and structural measures, it is reasonable to expect further financing from the ESM. However, political infighting over the speed and content of the measures and the ruling coalition’s small majority of only two votes, have created uncertainty over the program, and therefore Greece’s ability to meet its financial obligations. Measures such as a doubling of income tax for Greek farmers, which must be paid in advance, and a new round of pension cuts are particularly contentious.

While sustainable growth is fundamental to reducing the high public debt burden, meeting the fiscal targets and strengthening public finances are important to containing debt and securing further official sector debt relief. Following the recapitalization of the banking sector, reducing non-performing loans and lifting capital controls would ease financial constraints and increase economic output. Reform of product markets and public administration would likely improve competitiveness and create jobs, and reduce the regulatory burden.

Notes:
The rating committee discussed the following points: the benefits of Eurozone membership, the fiscal consolidation, structural reforms, political uncertainty, public sector debt dynamics, and financial stability.

All figures are in Euros 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.

The sources of information used for this rating include Ministry of Finance, Bank of Greece, PDMA, European Commission, AMECO, Eurostat, European Central Bank, IMF, World Bank, Haver Analytics, DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer and did not include participation by the issuer or any related third party.

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.

DBRS does not typically accept editorial changes other than to correct for factual, accuracy and/or to remove confidential, material non-public, or sensitive information that might otherwise be inadvertently disclosed.

Lead Analyst: Fergus McCormick
Rating Committee Chair: Roger Lister
Initial Rating Date: 16 August 2013
Most Recent Rating Update: 1 July 2015

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