DBRS Confirms the Hellenic Republic at CCC (high), Stable

DBRS Ratings Limited (DBRS) has confirmed the Hellenic Republic’s long-term foreign and local currency issuer ratings at CCC (high) and its short-term foreign and local currency issuer ratings at R-5. The trend on all ratings remains Stable.

The CCC (high) rating reflects Greece’s very high level of public-sector debt and the political challenge that the Greek authorities and the institutional creditors face in placing this debt on a firm downward path. On the 2 May 2017, the Greek authorities reached a preliminary agreement with creditors on a policy package that includes fiscal and structural measures to support economic recovery. While this agreement is a positive development, its conclusion has been delayed for months and DBRS remains concerned about long-term debt sustainability. Furthermore, banks’ weak asset quality and the high level of impaired loans constrain the banking system’s ability to support the economy and employment.

The Stable trend reflects DBRS’s view that the current official-sector financial support programme for Greece has eased the financial-sector liquidity squeeze and stabilized the economy. The second review of the Third Economic Adjustment Programme (the Third Programme), on completion, should release an additional €7.4 billion in funds and prior actions, including fiscal and structural measures, should provide a stimulus to growth.

Greece’s credit strengths include the benefits of euro zone membership and access to financial support from the European institutions. Since 2009, the country has implemented a significant fiscal adjustment. The cyclically adjusted primary balance has improved by 18% of gross domestic product (GDP; 2009-2016). In addition, progress has been made with structural reforms, including improvements in the labour market, reform of the tax code and streamlining the public administration. The external sector has also strengthened with the conversion of the current account into a small surplus +0.1% in 2015 and a small deficit -0.6% in 2016 from a large deficit of -11.4% of GDP in 2010.

However, credit challenges are considerable as the public debt ratio is extremely high. Greece’s banks have high levels of impaired assets and firm economic recovery is not yet underway. Meeting the fiscal and structural reform adjustments of the Third Programme amid social constraints and the government coalition’s slim three-seat majority in parliament continue to be challenging. That said, the recent agreement with creditors on fiscal and structural measures is encouraging in DBRS’s opinion.

Following the recapitalization of the banking sector in 2015, bank balance sheets remain weak and non-performing loans (NPLs) are high. On the other hand, the persistent withdrawal of bank deposits has stabilized, although they increased at the start of the year because of concerns over delays in the second review. Capital controls introduced in June 2015 have been eased; however, credit to the domestic private sector is declining and economic recovery has been delayed.

RATING DRIVERS

Triggers for a rating upgrade could include a combination of: (1) continued cooperation between Greece and its official creditors to implement fiscal and structural reforms; (2) a clearer view of external financing beyond the current Third Programme’s completion in August 2018; (3) clearing of public-sector arrears; and (4) economic recovery.

For a rating downgrade, drivers would likely be some combination of: (1) lack of cooperation with the institutional creditors; (2) external debt service payment arrears; and (3) renewed financial-sector instability.
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 the European Commission, the IMF, the World Bank, Haver Analytics, Bank of Greece, PDMA, Eurostat, ECB, Ministry of Finance, Ministry of the Interior and Reconstruction, United Nations Development Programme (HDI index) and opinion poll surveys – Alco, Pulse RC, Marc, PAMAK, Opinion Poll, Bridging Europe, Palmos Analysis, Kapa Research, MRB, AUEB Stat, Metron Analysis, Rass, Interview, Public Issue. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

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

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“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: Nichola James, Co-Head of Sovereign Ratings, Global Sovereign Ratings
Rating Committee Chair: Roger Lister, Chief Credit Officer, Global FIG and
Sovereign Ratings
Initial Rating Date: 16 August 2013
Last Rating Date: 9 December 2016

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