DBRS Confirms the Hellenic Republic at CCC (high), Trend Changed to Positive

DBRS Ratings Limited (DBRS) has confirmed the Hellenic Republic’s Long-Term Foreign and Local Currency – Issuer Ratings at CCC (high), and changed the trend from Stable to Positive. In addition, DBRS has confirmed the Short-Term Foreign and Local Currency – Issuer Ratings at R-5 and maintained the Stable trend.

The Positive trend reflects DBRS’s view that the current official-sector financial support programme for Greece has eased the financial-sector liquidity squeeze and the economy has returned to growth. The third review of the Third Economic Adjustment Programme (the Third Programme), should be completed in coming months and this will pave the way for discussions on the type of support available post-programme next August and on additional debt relief measures. Improvements in the “Economic Structure and Performance”, “Fiscal Management and Policy” and “Political Environment’ sections of the analysis were the key factors for the trend change.

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. Banks’ asset quality has improved since the last review, but the still weak operating environment continues to present challenges. Additional structural reforms are required to raise potential 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 and product market, reform of the tax code and streamlining the public administration. The external sector has also strengthened with the significant improvement of the current account into a small deficit estimated to be 0.2% of GDP in 2017 from a large deficit of 11.4% of GDP in 2010.

However, credit challenges are considerable as the public debt ratio is extremely high. Despite recent improvements in political risk and the implementation of fiscal and structural reforms, more structural reforms are required in the public sector, the labour market and in pensions, and continuing to meet primary surplus targets will be challenging from a social perspective.

Greece’s banks have high levels of impaired assets with a non-performing exposure ratio close to 45%. However, the banking sector has improved with a reduced reliance on the ECB’s Emergency Liquidity Assistance (ELA). The general trend of deposit repatriation continued in 2017, albeit at a slow pace. Capital controls introduced in June 2015 have been eased; credit to the domestic private sector is declining at a slower pace. A new round of ECB stress tests expected to be completed by mid-2018 have added a level of uncertainty to capital adequacy, but system-wide, the results are expected to be manageable.

RATING DRIVERS

Triggers for a rating upgrade could include: (1) continued cooperation between Greece and the 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 that could include additional debt relief measures.

Downward rating 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:
The main points of the Rating Committee discussion included Greece’s growth trajectory, fiscal performance, and debt relief measures.

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 Labour, Ministry of the Interior and Reconstruction, United Nations Development Programme (HDI index), 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 and US 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: 12 May 2017

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