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 all ratings is Stable.
KEY RATING CONSIDERATIONS
The confirmation of the Stable trend reflects DBRS Morningstar’s view that Greece entered the Coronavirus Disease (COVID-19) pandemic following years of solid fiscal performance and with the accumulation of sizeable cash reserves. This provides the country with some fiscal capacity to help weather the impact of the crisis. Against this background the authorities have implemented extraordinary fiscal measures to mitigate the impact of the economic shock, preventing closures of businesses and major job losses thus far. However, the COVID-19 outbreak has taken a heavy toll on the Greek economy leading to a sharp gross domestic product (GDP) contraction of 15.2% YOY in the second quarter of 2020, following a milder contraction of 0.5% YOY in the first quarter.
The sharp decline in real GDP is due to the strict measures to prevent the spread of the virus and the delayed reopening of the tourism season. The tourism sector, which is an important contributor to the economy and employment will be hit hard this year and its rebound will depend on the evolution of the virus. In response to the crisis, the government has engineered a swift response that will lead to a substantially higher fiscal deficit and public debt ratio.
The confirmation of the ratings is underpinned by Greece’s membership of the euro system. The majority government in place has strong commitment and momentum in implementing its reform agenda in co-operation with the European institutions. Over the past years Greece has maintained a prudent fiscal stance resulting in five years of primary surplus, overachieving its fiscal targets and leading to additional debt relief. Despite the very high stock of public debt, the inclusion of Greek bonds in the European Central Bank’s (ECB’s) Pandemic Emergency Purchase Programme (PEPP) safeguards Greece’s ability to access the markets at historically low funding costs. Furthermore, Greece is expected to receive a substantial amount of grants from the Next Generation EU financial instrument amounting to 8.9% of GDP that will likely support the recovery and a more sustainable economic growth path over the medium term.
Triggers for an upgrade include: (1) effective management of the coronavirus crisis, returning the economy to sustained 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.
Greece’s Economy Will Sharply Contract This Year, But EU Funds and Extraordinary Measures Will Likely Support Recovery Over the Medium Term
The Greek economy will experience a severe contraction this year, as the pandemic has led to weaker global and domestic demand. The strict containment measures imposed in March and the travel restrictions, which remained in place until July resulted in a 7.9% decline in real GDP in the first half of the year compared with the same period in 2019. Private consumption accounted for almost half of the drop in economic activity, followed by investment and net exports. The tourism industry, which represents a major source of income and employment for the Greek economy will suffer severe losses this year. The European Commission projects the economy to contract by 9% in 2020.
The swift response to the pandemic allowed for the gradual easing of restrictive measures in May which together with the policy measures, prevented material business closures and major job losses thus far. High reliance on tourism poses additional challenges to Greece’s capacity to facilitate a swift economic recovery. Nevertheless, significant progress has been made in strengthening growth prospects by improving the business climate and reducing bureaucracy that has in the past curtailed private investment. Additionally, Greece will benefit substantially from the Next Generation EU financial instrument, as Greece will likely receive around 32 billion euros (17% of 2019 GDP) in grants and loans, in addition to 40 billion from the EU’s Cohesion Fund. In DBRS Morningstar’s view, Greece’s ability to improve its absorption capacity, while maintaining its reform momentum will be key in determining the pace of the economic recovery.
External Imbalances - Worsening in Tourism Partially Offset by Likely EU Inflows
After years of large deficits, Greece’s current account deficit as a share of GDP narrowed substantially from -15% in 2008 to -1.4% in 2019. This is due to improvement in exports of goods and services, which increased by more than seventeen percentage points from 2010 to 2019. The strong performance of the services balance, which is mainly attributed to an improvement in the travel balance with foreign arrivals increasing by almost 26% in the period 2016-2019, is expected to be affected severely by the global health crisis this year. However, it will be partially offset by EU funds flows and the decline in tourism-related imports.
International arrivals declined by 80% and travel receipts by 86% in January to July 2020 compared with the same period last year, but are expected to have only partially recovered in August, traditionally the strongest month in the tourism season. The current account is expected to deteriorate this year to around -5% of GDP. Furthermore, Greece’s net external liabilities remain high at 153% of GDP in 2019, up from 89% in 2011, mostly reflecting public sector external debt. The level is expected to remain at high levels because of the long-term horizon of foreign official-sector loans to the public sector.
Extraordinary Measures Will Lead to a High Fiscal Deficit This Year
After five consecutive years of fiscal surplus overperformance, the fiscal balance will turn negative this year, as the coronavirus outbreak takes its toll on the public sector accounts. In response to the COVID-19 disease, the Greek government implemented a series of fiscal measures aimed at supporting the economy and mitigating the economic impact of the pandemic. The support packages announced so far include (1) job retention schemes and financial support to the self-employed; (2) increased expenditures to support the health care system; (3) VAT reduction in goods related to addressing the outbreak; and (4) liquidity support to businesses through loan guarantees and deferred payments of taxes and social contributions. The cost of the fiscal package is estimated at 8.3% of 2019 GDP. In addition, payment of compensation to pensioners after the Council of State’s ruling on pensions will add to fiscal costs.
The IMF is estimating a headline fiscal deficit this year of 9% of GDP compared with a small surplus of 0.6% in 2019. 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 2021 is no longer a requirement for Greece and new targets for 2022 onwards will be agreed with the EU institutions. Given the uncertainties around the evolution of the virus and possible need for additional fiscal support measures, DBRS Morningstar has a negative qualitative assessment of the “Fiscal Management and Policy” building block.
During its economic adjustment programmes Greece implemented various reforms, that corrected the fiscal imbalances and improved its fiscal management, resulting in primary surpluses of around 4% of GDP on average since 2016. Despite the significant fiscal adjustment, prolonged deviation from prudent fiscal policies could pose a risk to Greece’s debt sustainability.
The Debt Ratio is High, but Mitigating Factors are in Place
The debt ratio is set to increase amid policy response measures to mitigate the economic impact of COVID-19, reaching 197.4% of GDP this year before falling to 184.7% of GDP in 2021, according to the Draft Budgetary Plan 2021. The debt stock remains at a very high level, however, mitigants to this include the fact that the official sector holds around 80% of government debt. Also, the debt has a very long weighted-average maturity of 20.2 years as of June 2020, and 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.
Moreover, Greece’s participation in the ECB’s PEPP contributes to more favorable financing conditions as seen in recent bond issuances at historically low yields. The sizeable liquidity buffer that amounts to around Euro 37 billion in total, is supporting Greece’s efforts to strengthen confidence among market participants. These reserves reduce repayment risks leading to a positive qualitative assessment in the “Debt and Liquidity” building block.
COVID-19 will Slow the Pace of NPEs Reduction But Supervisory Measures Alleviate the Pressure
Driven mainly by sales and write-offs, the non-performing loans (NPLs) of the Greek banking system continued to reduce during 2019, standing at EUR 68.5 billion at the end of the year. Even though NPLs have declined by EUR 38.7 billion since the March 2016 peak, they accounted for a significant 40.6% of the loan books. Despite the elevated uncertainty and the deteriorating macroeconomic environment related to the COVID-19 crisis, banks made further progress in reducing their non-performing loans (NPLs) in the first half of 2020 by almost EUR 9 billion, with the NPL ratio reducing further to 36.7%. This reduction primarily reflects the completion of Eurobank’s securitization transaction under the Hercules Asset Protection Scheme (HAPS), for an amount of EUR 7.5 billion. The other three systemic banks have also announced plans to utilise HAPS, whilst also continuing to progress with the sale of NPL portfolios. Should the bulk of the NPL securitisations currently being executed materialize within 2020, the stock of non-performing loans will have reduced by EUR 20 billion in total in 2020.
However, the uncertainty caused by the COVID-19 pandemic could weigh negatively on the timely completion of the transactions (See DBRS Morningstar’s commentary “Greek Banks Contain COVID-19 Impact to Date, but Downside Risks Loom”). Moreover, domestic loan repayment moratoria granted by the four systemic banks in order to alleviate the pressure of distressed corporate and households pose additional risks to banks’ asset quality, with the loans under moratoria amounting to circa EUR 18.9 billion at end-May 2020. Nonetheless, the ECB’s decision to temporarily ease its collateral rules and accept Greek government bonds as collateral has enhanced the banks’ liquidity position and their ability to support new lending.
The Government’s Response to the Crisis thus far and Continued Commitment to and Momentum behind Reforms is Encouraging
In response to the COVID-19 crisis, the government has engineered a swift response and prevented a severe health crisis thus far. However, the rise in infections at 64 cases per 100,000 over the last 14 days has led to the imposition of additional restrictions and increases the economic uncertainty. Since its election in July 2019, the majority New Democracy government has made significant progress in unblocking major investment projects and reducing bureaucracy. DBRS Morningstar views the recent effort to improve the functioning of the public administration by digitalizing a significant number of processes as positive and if continued could be an important step in improving the business environment in Greece. DBRS Morningstar views that the improvement in Greece’s political environment warrants a positive qualitative assessment for the “Political Environment” building block.
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 2019 Greece ranks in the 60th percentile for Rule of Law and in the 67th 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/368817.
EURO AREA RISK CATEGORY: LOW
DBRS Morningstar changed the euro area risk category of the Hellenic Republic from MEDIUM to LOW. Despite the deterioration in the macroeconomic environment due to the COVID-19 shock, the Greek government has shown commitment in maintaining the reform effort and promoting growth enhancing policies in co-operation with the EU institutions. In DBRS Morningstar’s view, the EU policy response is likely to reduce the risk of deeper economic and public finance disparities across the Union. As a consequence, Greece’s high debt stock is less likely to become source of tension with its main creditors.
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 (July 27, 2020) https://www.dbrsmorningstar.com/research/364527/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 July 2020), Public Debt Management Agency, Greek Ministry of Finance (Draft Budgetary Plan 2021), Eurostat, BIS, ECB, European Council: Consilium Europa, European Commission (Enhanced Surveillance Report – Greece, September 2020), IMF (World Economic Outlook October 2020), World Bank, UNDP, European Centre for Disease Prevention and Control, 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:
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/368816.
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: April 24, 2020
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