DBRS Morningstar Confirms the Hellenic Republic at BB (low), Trend Changed to Positive

DBRS Ratings GmbH (DBRS Morningstar) confirmed the Hellenic Republic’s Long-Term Foreign and Local Currency – Issuer Ratings at BB (low) and the Short-Term Foreign and Local Currency – Issuer Ratings at R-4. The trend on the Short-Term Foreign and Local Currency – Issuer Ratings remains Stable and the trend on the Long-Term Foreign and Local Currency – Issuer Ratings is changed from Stable to Positive.

KEY RATING CONSIDERATIONS

The confirmation of the ratings reflects the fact that Greece is emerging from the crisis years and is currently in its third consecutive year of growth. Primary surplus targets are on track. A large cash buffer exists equivalent to around two years of gross public sector borrowing needs and borrowing costs are at post-crisis lows. Still, the public debt burden is large, estimated by the government to amount to 173.3% of GDP at end-2019. However, the high public debt stock is mitigated to some extent by the very long weighted-average debt maturity and the fact that European Union (EU) institutions hold the majority of debt.

Since the last rating review, progress is being made in several respects, leading to the Positive trend. A new majority government is in place with strong commitment and momentum in introducing its reform agenda. Pro-active public debt strategy has consolidated market access, and in addition, Greece is on course to pre-pay Euro 2.7bn of relatively more expensive debt owed to the IMF. Moreover, the Hercules asset protection scheme looks set to support banks removing non-performing exposures from their balance sheets, while capital controls were fully lifted on 1 September 2019.

RATING DRIVERS

Triggers for upward rating action include: (1) continued implementation of fiscal and structural reforms to support future economic growth; (2) compliance with post-programme monitoring; (3) further consolidation of bond market access (4) continued improvement in the financial health of banks.

By contrast, triggers for downward rating action include: (1) a reversal or stalling in structural reforms; (2) material fiscal slippage (3) renewed financial-sector instability.

RATING RATIONALE

The New Greek Government Shows Strong Commitment to Economic Reform
The 7 July general elections brought to government the center right New Democracy party with an outright majority of 158 seats out of 300. It is the first one-party government in Greece after nearly ten years. The outcome of the election gives New Democracy’s leader and Prime Minister, Mr Kyriakos Mitsotakis, a strong mandate to implement his reform agenda. Furthermore, DBRS Morningstar views that Parliament’s decision to delink the failure of appointing the President of the Republic from the premature dissolution of the Parliament as positive. This decision will likely reduce the risk of early elections and increases the stability of the government.

Economic Growth Prospects Improve on Reform and Fiscal Efforts

The Greek economy continues on a path of economic recovery for a third consecutive year. GDP growth accelerated in 2018 to 1.9%, up from 1.5% in 2017, driven by stronger exports and higher private consumption. Exports have been a consistent contributor to the recovery, reflecting the substantial improvement of the export share from 19% of GDP in 2009 to 36% in 2018. After a weak start in the first three months of the year, the economy accelerated in Q2 2019 posting a solid annual growth rate of 1.9%, again underpinned mainly by strong export growth and a rebound in private consumption. The economic sentiment indicator amounted to 107.2 in September, close to a 12-year high, and consumer confidence is at its highest level since April 2000. Real GDP growth is expected to reach 2% this year and to accelerate to 2.8% in 2020 according to government projections, supported by structural reforms. These reforms aim to address impediments to investment. In addition, fiscal measures presented in the 2020 draft budget, skew the fiscal mix towards growth supportive measures.

The ‘Invest in Greece’ growth and development bill has been ratified by the Greek Parliament. The bill aims to support productivity and strengthen growth by reducing bureaucracy that has in the past curtailed private investment. A Bank of Greece study illustrates that the full implementation of the measures, could add at least 5 percentage points to real GDP in the next ten years. In addition, labour market reforms have contributed to employment growth and the unemployment rate has been falling. The rate decreased to 16.9% in July 2019 from 19.1% in July 2018, albeit remaining the highest in the EU. DBRS Morningstar considers that strong reform commitment and momentum will lead to new reform effort and will safeguard the reforms that have already been adopted. This factor enhances Greece’s long-term growth prospects and as such has led to an uplift in DBRS Morningstar’s qualitative assessment of the “Political Environment” building block.

The Debt Ratio is High, but Set to Decline in the Forecast

After peaking at 181.1% in 2018, the debt ratio is estimated at 173.3% in 2019 and looks set to further decline to 167.8% in 2020, according to government forecasts. To achieve this, Greece is expected to deliver an appropriate growth friendly fiscal policy mix that includes primary surpluses. Debt stock remains at a very high level, however, mitigants to this include the fact that EU institutions hold around 70% of government debt. This contributes to the very long weighted-average maturity and the fact that most of debt is financed at very low interest rates.

Greece is applying a strategy of reducing the interest rate burden by pre-paying more expensive debt. This month, the Boards of Directors of the European Stability Mechanism (ESM) and the European Financial Stability Facility (EFSF) agreed to waive the mandatory repayment obligations of ESM/EFSF loans in connection with a partial early repayment by Greece to the IMF, amounting to around Euro 2.7bn.

Moreover, Greece has made progress towards the consolidation of bond market access. In the recent re-opening of its 10-year bond in October, Greece raised Euro 1.5bn at a historically low rate of 1.5%. In addition to the favourable environment in international bond markets, this also reflects the growing confidence in the Greek economy. DBRS Morningstar considers that the implementation of growth-supporting policies, while remaining fiscally prudent, and at the same time maintaining the liquidity buffer that amounts to around Euro 30 billion in total, is supporting Greece’s efforts to strengthen confidence among market participants. The sizeable cash buffer that reduces repayment risk has led to an upward adjustment in the qualitative section of the “Debt and Liquidity” building block.

Greece Continues to Meet its Primary Surplus Targets

Since 2010, Greece has undertaken an unprecedented fiscal adjustment, with the cumulative improvement in the primary balance exceeding 11 percentage points by 2018. In 2018 Greece delivered a primary surplus of 4.3% of GDP well above the 3.5% target set by the programme, due to higher than expected revenues and the under execution of the public investment budget. In the 2020 draft Budget, the Greek authorities project a primary surplus of 3.7% for the current year and 3.6% for 2020, in excess of the 3.5% target. Fiscal measures include the reduction of property tax (ENFIA), lowering personal and corporate rate tax and enhancing the electronic payment system.

Various reforms implemented during the economic adjustment programmes improved Greece’s fiscal management by modernizing the tax system and enhancing tax compliance. Progress with privatization is visible in the Hellenikon development, as bureaucracy has been unblocked. DBRS Morningstar considers that commitment to the structural reform agenda helps towards mitigating the risks to the fiscal outlook and safeguards Greece from potential fiscal shocks.

Steps Taken to Strengthen Financial Institutions

The high level of non-performing exposures, the highest in the European Union, at around EUR 75 billion or 43.6% of gross loans at end-June 2019, remains a challenge for Greece. However, non performing exposures are on a downward trend, falling by more than EUR 30 billion from the peak in March 2016. The reduction has been mainly driven by sales and write-offs. The four systemic banks aim to reduce their non-performing exposures significantly by end-2021 and have submitted updated operational targets to the Single Supervisory Mechanism (SSM). For more information on Greek Banks, see DBRS Morningstar commentary, “Greek Banks Accelerate Efforts to Restore Fundamentals”.
http://www.dbrs.com/research/350938

On 10 October the European Commission approved Greece’s plan known as the Hercules Project (HAPS) to accelerate the reduction of banks’ non-performing exposures (NPEs). This may, by further strengthening banks’ balance sheets, help build on the recovery in bank credit to corporations and reverse the contraction in bank loans to households. The HAPS, which involves NPE portfolio securitizations with around 9 billion euros of government guarantees for senior tranches, could help the banks offload around 30 billion euros of bad loans, according to the government. DBRS Morningstar views that the implementation of the HAPS could support banks’ efforts to clear their balance sheets from legacy loans and to also aid the recovery of the economy. For further details, see DBRS Morningstar commentary “Hercules Ready to Lift Greece: A Big Step in the Resolution of the NPL Issue”.
http://www.dbrs.com/research/351771

Improvement in External Imbalances

After years of large deficits, Greece’s current account narrowed by more than ten percentage points of GDP. In 2018, the deficit stood at 2.9% of GDP from 1.8% in 2017. This is partly due to a weakening balance of goods, which was only partially offset by the improvement in the services balance. The strong performance of the services balance is mainly attributed to the improvement in the travel balance with foreign arrivals increasing by almost 20% in the period 2016-2018. Overall, Greek exports have increased significantly, due to the improved competitiveness. However, Greece’s net external liabilities remain high at 143.8% of GDP in 2018, up from 88.8% in 2011, mostly reflecting public sector external debt. It is expected to remain at high levels because of the long-term horizon of foreign official-sector loans to the public sector.

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments.
http://www.dbrs.com/research/352366

EURO AREA RISK CATEGORY: MEDIUM

Notes:

All figures are in Euros unless otherwise noted. Public finance statistics reported on a general government basis unless specified.

The principal applicable methodology is the Global Methodology for Rating Sovereign Governments, which can be found on the DBRS Morningstar website www.dbrs.com at http://www.dbrs.com/about/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 at http://www.dbrs.com/ratingPolicies/list/name/rating+scales.

The sources of information used for this rating include IMF, World Bank, UNDP, Haver Analytics, Bank of Greece, PDMA, Greek Ministry of Finance, Eurostat, BIS, ECB, European Council: Consilium Europa, European Commission. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar 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 Morningstar’s outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar 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 GmbH 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, Managing Director, Chief Credit Officer, Global FIG and Sovereign Ratings.
Initial Rating Date: August 16, 2013
Last Rating Date: May 3, 2019

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