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

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

KEY RATING CONSIDERATIONS

Since the last rating review the Coronavirus Disease (COVID-19) has led to economic shutdown and likely recession and the timing and speed of an eventual recovery is uncertain, leading to the Trend change from Positive to Stable. In response to the crisis, the government has engineered a swift response and prevented a severe health crisis thus far. Extraordinary fiscal measures will reduce the severity of the economic impact, but still, the economy is likely to contract heavily this year, exacerbated by the importance of tourism and shipping; and unemployment will rise. At the same time, the timing of economic recovery and, therefore, the 2021 growth outlook remain unclear. Under these circumstances, the public debt ratio and the fiscal balance will deteriorate and the duration of the deterioration is highly uncertain.

The confirmation of the ratings reflects the fact that the majority government is in place with strong commitment and momentum in introducing its reform agenda. Greece emerged from the crisis with three years of growth and five years of primary surplus, contributing to a large cash buffer. Still, the public debt burden is large at 176.6% of GDP at end-2019, and now is set to increase further. 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 it. Also, Greek government bonds are now included in the European Central Bank’s (ECB’s) Pandemic Emergency Purchase Programme (PEPP).

RATING DRIVERS

Triggers for an upgrade include: (1) effective management of the coronavirus crisis, returning the economy to growth; (2) compliance with EU institutions’ post-programme monitoring, co-operation on fiscal efforts and continuation with structural reforms.
By contrast, triggers for a downgrade include: (1) persistent negative economic performance; (2) a reversal or stalling in structural reforms and longer term, lack of fiscal effort; (3) renewed financial-sector instability.

RATING RATIONALE

The COVID-19 Outbreak is Set to Derail Economic Recovery, but the Government has Engineered a Swift Response

As of 23rd April, 2,463 cases and 127 deaths have been confirmed in Greece from the COVID-19 disease. The government’s swift response to the epidemiological crisis has prevented a severe health crisis thus far. In an attempt to slow the spread of the virus and to support the health system, the government on 2nd March closed schools and universities, followed by closures of non-essential businesses. A national lockdown was imposed on 23rd March. In response to the health crisis, the government has announced extraordinary fiscal measures to mitigate the economic impact and to provide liquidity to corporates and households. Moreover, since its election in July 2019, the first one-party government in Greece after nearly ten years, has passed a number of bills to support productivity and strengthen growth by reducing bureaucracy that has in the past curtailed private investment. This supports DBRS Morningstar’s positive qualitative assessment for the “Political Environment” building block.

As the coronavirus outbreak takes its toll, the Greek economy is heading into recession with GDP likely declining over 5% this year. Prior to the outbreak, the European Commission projected GDP growth above 2% in 2020 and in 2021, supported by higher consumption and strong investment growth. Exports have been a consistent contributor to the past recovery, reflecting the substantial improvement of the export share from 19% of GDP in 2009 to 39% in 2019.

The impact of the spread of COVID-19 is set to derail the recovery of the Greek economy through various avenues. Weaker global and domestic demand will hit exports and imports of goods significantly. Moreover, the strict containment measures and travel restrictions pose an elevated risk to Greece’s tourism sector, which contributes directly more than 10% of GDP. The high reliance on tourism is also evident in the labour market with approximately 16% of the total work force employed in the tourism industry. Given the high seasonality of the tourism sector, with almost 77% of tourist arrivals concentrated in the third quarter of the year, the losses for the industry could be contained if the travel restrictions loosen in the second half of the year. The deterioration in Greece’s growth prospects supports DBRS Morningstar’s negative qualitative assessment of the “Economic Structure and Performance” building block.

The economy accelerated in 2019 posting a solid annual growth rate of 1.9%, again underpinned mainly by strong export growth and a rebound in private consumption. Significant progress has been made in improving the prospects of the Greek economy. Since July 2019, the Greek government has passed a number of bills to support productivity and strengthen growth by reducing bureaucracy that has in the past curtailed private investment. However, the deteriorating investment climate will likely delay the government’s plan to boost foreign investment.

After Five Years of Fiscal Outperformance Extraordinary Measures Will Result in Deficit in 2020

After five consecutive years of fiscal target outperformance, DBRS Morningstar expects the fiscal balance to turn negative this year, as the coronavirus outbreak takes its toll. In response to COVID-19 the Greek government announced a set of fiscal measures, amounting to 3.5% of GDP, aiming to support the economy and dampen the impact of the pandemic. The fiscal package announced so far includes (1) postponement of VAT and social contribution payments for companies until the end of August, VAT reduction in goods related to addressing the outbreak, (2) financial support to employees and the self-employed covering 81% of the private sector employees and the extension of unemployment benefits, (3) payment of government arrears to provide liquidity and (4) increased expenditures to support the health system. The cost of the fiscal package is estimated at EUR 6.8 billion (3.5% of GDP). The IMF is forecasting a headline fiscal deficit this year of 9% of GDP compared with a small surplus of 0.4% in 2019 and this expected deterioration weighs on DBRS Morningstar’s qualitative assessment of the “Fiscal Management and Performance” building block. To support fiscal measures dealing with the consequences of the coronavirus, the European Commission agreed that the 3.5% of GDP primary surplus fiscal target for 2020 is no longer a requirement for Greece as flexibility with the fiscal rules is granted.

Since 2010, Greece has undertaken an unprecedented fiscal adjustment repairing its fiscal accounts. Various reforms implemented during the economic adjustment programmes improved Greece’s fiscal management and corrected the fiscal imbalances. Primary surpluses of around 4% of GDP on average since 2015 reflect Greece’s commitment to fiscal consolidation. In DBRS Morningstar’s view Greece has made significant fiscal adjustment, however, a prolonged shock that requires significantly larger fiscal measures to support households and businesses could pose a downside risk to Greece’s fiscal sustainability.

External Imbalances - Worsening in Tourism Partially Offset by Likely EU Inflows

After years of large deficits, Greece’s current account narrowed by more than ten percentage points of GDP. In 2019, the deficit stood at 1.4% of GDP from 2.8% in 2018. This is due to the improvement in the balance of services, and also in the increased receipts of the primary and secondary income accounts. Overall, Greek exports have increased significantly, due to the improved competitiveness. The strong performance of the services balance, which is mainly attributed to the improvement in the travel balance with foreign arrivals increasing by almost 20% in the period 2016-2018, is expected to be affected severely by the global health crisis. Dented external demand will have a negative impact on the travel balance, which represents almost 70% of the balance of services, although partially offset by EU funds flows. Furthermore, Greece’s net external liabilities remain high at 151% of GDP in 2019, 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.

The Debt Ratio is High, but Mitigating Factors are in Place

After falling to 176.6% in 2019 from its peak at 181.1% in 2018, the debt ratio is set to increase this year amid mounting fiscal costs to mitigate the economic impact of COVID-19. The debt stock remains at a very high level, however, mitigants to this include the fact that the official sector holds around 81% 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, with more than 90% of debt at fixed rates, mitigating the risks arising from increased market volatility.

In 2019, Greece has made further progress towards the consolidation of bond market access, raising around EUR 9 billion, while achieving historically low yields. In addition to the favorable environment in international bond markets, this also reflects the growing confidence in the Greek economy. The ECB’s decision to include purchases of Greek government bonds in its EUR 750 billion PEPP until the end of 2020 should also contribute to more favorable financing conditions. Moreover, the sizeable liquidity buffer that amounts to around Euro 36 billion in total, is supporting Greece’s efforts to strengthen confidence among market participants. These reserves reduce repayment risk leading to an upward qualitative assessment of the “Debt and Liquidity” building block.

Steps Taken to Strengthen Financial Institutions, But Key Systemic Vulnerabilities Remain

Non-performing exposures (NPE’s) remain high, totaling around EUR 71 billion at end-September 2019. This equates to an NPE ratio of approximately 42.1% of gross loans, the highest in the EU, and continues to pose a challenge for Greece’s financial stability. However, NPEs have been on a downward trend, decreasing by more than EUR 30 billion from the peak in March 2016. The reduction has been mainly driven by sales and write-offs.

In December 2019, the Hercules Asset Protection Scheme (HAPS) was legislated as a systemic solution to accelerate the reduction of the banks’ NPEs through securitisations, for which government guarantees would be provided for the senior tranches. All four systemic banks have announced plans to utilise HAPS and remove from their balance sheets NPEs for a combined amount of around EUR 32.5 billion. However, elevated uncertainty related to the COVID-19 outbreak in terms of both the domestic economy and the disruptions in the financial markets will most likely result in the major banks’ NPE reduction plans slowing down. For further details, see DBRS Morningstar commentary “Coronavirus Likely to Disrupt Greek Banks' NPE Reduction Plans”. (https://www.dbrsmorningstar.com/research/359415) Nonetheless, the ECB’s recent decision to temporarily ease its collateral rules and start accepting Greek government bonds as collateral in its liquidity operations will enhance banks’ liquidity position and their ability to support the real economy.

ESG CONSIDERATIONS

Human Capital and Human Rights (S) and Institutional Strength, Governance and Transparency (G) were among key drivers behind this rating action. Compared with its euro system peers, Greece’s per capita GDP is relatively low at $20k in 2019. According to World Bank Governance Indicators 2018 Greece ranks in the 59th percentile for Rule of Law and in the 66th percentile for Government Effectiveness. However, DBRS Morningstar notes Greece’s institutional strengths associated with eurosystem membership and recent improvements in these areas. These factors have been taken into account within the following building blocks: Fiscal Management and Policy, Economic Structure and Performance and Political Environment.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments.
https://www.dbrsmorningstar.com/research/360028

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 methodology is the Global Methodology for Rating Sovereign Governments (September 17, 2019) https://www.dbrsmorningstar.com/research/350410/global-methodology-for-rating-sovereign-governments

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The sources of information used for this rating include Hellenic Statistical Authority, Bank of Greece (Financial Stability Review December 2019), Public Debt Management Agency (Funding Strategy 2020), Greek Ministry of Finance, Eurostat, BIS, ECB, European Council: Consilium Europa, European Commission (2020 European Semester: Country Report and Enhanced Surveillance Report – Greece, February 2020), IMF (World Economic Outlook October 2019 and April 2020), World Bank, UNDP, Haver Analytics. 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 12-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.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/360027

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Nichola James, Managing Director, Co-Head of 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: November 1, 2019

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