DBRS Confirms Greece at CCC (high), Stable Trend

DBRS, Inc. (DBRS) has confirmed the Hellenic Republic’s long-term foreign and local currency issuer ratings at CCC (high) with a Stable trend. DBRS has also confirmed the short-term foreign and local currency issuer ratings at R-5 with a Stable trend.

The Stable trend reflects our view that the current financial support program is reinforcing the stabilization of the Greek economy and banking sector. The three-year €86 billion Third Adjustment Program has eased the liquidity squeeze and, following Greek parliamentary approval of the latest fiscal and structural measures in the first program review last month, appears to cover the remainder of this year’s debt service payments. This should help foster the economy to return to growth.

However, given Greece’s social and political constraints to meeting the program objectives, there is a risk of delays in funding support in 2017 should Greece fail to comply with the second program review, to be concluded in October 2016. The program has set ambitious targets that will require sustained fiscal consolidation and structural reforms. Implementation risk and large external imbalances make the recovery fragile and exposes Greece to shocks.

Greece’s credit strengths include the benefits the country enjoys from Eurozone membership and access to financial support from European institutions. Since 2009, the country has enacted a large fiscal adjustment, and has made progress in reforming the labor market, improving the tax code and streamlining public administration. The external sector has also shown sustainable improvement, with the conversion of the current account from a large deficit into a small surplus.

However, Greece continues to face considerable challenges in restoring financial stability and returning to sustainable growth while consolidating public finances under a fragile coalition government. After a delay of several months, the ruling SYRIZA-ANEL coalition has approved most of the conditions of the support program. However, meeting the fiscal and structural reform adjustments of the program amid social constraints and a slim three-seat majority in the parliament will be challenging.

Following the recapitalization of the banking sector in 2015, bank balance sheets remain weak. Non-performing loans are high, there has been a persistent withdrawal of bank deposits, and bank capital contains a high percentage of deferred tax assets. Combined with capital controls that have yet to be dismantled, these conditions have prevented an easing of financial constraints, and both the supply and demand for credit has remained low.

RATING DRIVERS
Given the high dependence on official sector financing, triggers to a rating upgrade include ongoing cooperation between Greece and the institutions to ensure viable policies in return for cash injections, and measures that smooth the debt servicing profile and facilitate the payment of public sector arrears. Structural reforms that enhance product markets to raise potential GDP growth, and structural fiscal adjustment measures such as broadening the tax base and reducing spending on wages and pensions, would improve creditworthiness. (The program includes a provision to cut pension spending by 1% of GDP this year.) Strengthening bank balance sheets to facilitate the supply of credit to the economy would put further upward pressure on the ratings.

Downward pressure on the ratings could result in the event of political instability that jeopardizes relations with the institutions, calling debt servicing into question; significant fiscal slippage or a reversal of reforms; or an inability to weather external shocks, such as a UK vote to leave the EU on June 23.

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

The sources of information used for this rating include Public Debt Management Agency, Ministry of Finance, Bank of Greece, European Commission, European Central Bank, Eurostat, IMF, World Bank, Ministry of Interior and Administrative Reconstruction, and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities.

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: Roger Lister
Initial Rating Date: 16 August 2013
Most Recent Rating Update: 11 December 2015

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