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 arrived to the current crisis following years of fiscal overperformance, which together with the sizeable cash reserves provide the country with some fiscal capacity to help weather the impact of the crisis. The coronavirus crisis has taken a heavy toll on the Greek economy leading to a sharp real GDP contraction of 8.2% in 2020. This was due to the strict measures to prevent the spread of the virus and the fallout of the tourism sector, which is an important contributor to the Greek economy. In response to the crisis, the government has implemented targeted measures to support households and businesses affected by the crisis. 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. Since its election in July 2019, the Greek government has showed strong commitment in implementing its reform agenda in co-operation with the European institutions. On the back of structural fiscal reforms implemented during the adjustment programs, Greece has maintained a prudent fiscal stance, up until the crisis, resulting in five years of primary surplus, overachieving its fiscal targets and leading to additional debt relief.
Additionally, 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. Benefiting from the favorable financing environment Greece is on course to prepay EUR 3.3 billion of more expensive debt owed to the IMF. Most importantly, Greece is expected to receive a substantial amount of grants from the Next Generation EU financial instrument amounting to around 9% of 2019 GDP that will likely support the recovery and improve the growth prospects of the Greek economy.
Triggers for an upgrade include: (1) effective management of the coronavirus crisis, returning the economy to sustained growth; and (2) compliance with EU institutions’ post-programme monitoring, co-operation on fiscal efforts and continuation with structural reforms.
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 Contracted Sharply Last Year, But EU Funds and Extraordinary Measures Will Likely Support Recovery Over the Medium Term
The coronavirus crisis interrupted abruptly the slow but steady recovery of the Greek economy after the global financial crisis. Greece’s real GDP is estimated to have contracted by 8.2% in 2020. The strict containment measures led to a severe economic contraction in the second quarter, followed by a comparatively weak performance relative to the euro area rebound in the third quarter, due to the high dependence on tourism. The tourism industry, which represents a major source of income and employment for the Greek economy suffered substantial losses, accounting for almost half of the drop in economic activity. Despite the new restrictions imposed in November, private consumption, exports of goods and investment showed resilience in the fourth quarter. The European Commission projects the economy to grow by 3.5% in 2021 and by 5% in 2022, however the impact of the Next Generation EU plan is not incorporated in the forecast and constitutes an upside risk.
The surge in infections in the first quarter of this year and the tightening of the restrictive measures will likely delay the recovery. High reliance on tourism and a large share of small and medium sized enterprises 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. In addition, Greece will benefit substantially from the Next Generation EU financial instrument, as Greece will receive around 32 billion euros (17% of 2019 GDP) in grants and loans until 2026. In November 2020, Greece released the draft version of the National Recovery and Resilience Plan. The main pillars of the plan include the green and digital transition, promoting employment, skills, and social cohesion and private investment and economic and institutional transformation. In DBRS Morningstar’s view, Greece’s ability to improve its absorption capacity, while maintaining its reform momentum will be key in determining its growth outlook.
Extraordinary Measures Will Lead to a High Fiscal Deficit This Year
Extraordinary fiscal measures to support the economy and mitigate the economic impact of the pandemic led to a high fiscal deficit of 9.9% in 2020. 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. 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. The Ministry of Finance is estimating a headline fiscal deficit of 6.7% of GDP this year. 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.
External Imbalances - Worsening in Tourism Partially Offset by Likely EU Inflows
The deterioration in the services balance resulted in a 6.7% deficit in the current account last year. International arrivals and travel receipts declined by around 76% compared to 2019. The slow recovery in international travel flows is expected to affect the current account also this year, but is expected to be partially offset by EU funds flows. The IMF forecasts a 4.5% current account deficit in 2021. From a stock perspective, Greece’s net external liabilities remain high at 168.5% 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.
The Debt Ratio is High, but Mitigating Factors are in Place
The debt ratio increased last year due to policy response measures and the contraction of the economy, reaching around 202.4% of GDP from 181% in 2019. The debt stock remains at a very high level, however, several mitigating factors are in place. Greece is benefiting from a favourable debt structure as the official sector holds around 80% of government debt with most of it financed at very low interest rates. In addition, the debt has a very long weighted-average maturity of 20 years as of December 2020 with more than 90% of debt at fixed rates, mitigating the risks arising from increased market volatility.
Greece’s participation in the ECB’s PEPP contributes to more favorable financing conditions as seen in bond issuances at historically low yields. Benefiting from the low interest rate environment, the Greek authorities are planning also to prepay approximately EUR 3.3 billion of relatively more expensive debt owed to the IMF. The debt ratio is expected to decline this year slightly below 200%. Also, the sizeable liquidity buffer that amounts to around Euro 31 billion in total as of December 2020, is supporting Greece’s efforts to strengthen confidence among market participants. These reserve buffers reduce repayment risks leading to a positive qualitative assessment in the “Debt and Liquidity” building block.
Hercules has Helped Banks to Facilitate NPL Disposals, But COVID-19 Crisis Will Lead to New NPLs
Despite the elevated uncertainty and the deteriorating macroeconomic environment related to the current crisis, banks made further progress in reducing their non-performing loans (NPLs) during 2020 by almost EUR 10 billion. The NPL ratio decreased from 40.6% at the end of 2019 to 35.8% at end September 2020. This reduction was primarily driven by the utilization of the Hercules Asset Protection Scheme (HAPS) by Eurobank for an NPE securitisation of EUR 7.5 billion. Further reduction is expected within the next months, as more transactions have been announced by the other three systemic banks, with most of them having a binding agreement in place. Assuming all pending transactions get completed, this would have resulted in NPL disposals of around EUR 18 billion, bringing the NPL ratio down to 25%. See DBRS Morningstar’s commentary “Hercules Helps Greek Banks Lower their NPE Stock, But Not a 'Job Done' Yet”.
However, the coronavirus crisis is likely to weigh on banks’ asset quality, with the loans under moratoria amounting to circa EUR 21 billion (or 12% of total bank loans) at end-November 2020. While the outlook for the future performance of these loans remain unclear, we consider it likely that a portion of these loans will not be returning to performing status. Nonetheless, the extension of the Hercules scheme and the implementation of the new insolvency framework will likely support banks’ efforts to clean up their balance sheets. Finally, 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.
Continued Commitment to Investment Enhancing Policies is Encouraging
Since its election in July 2019, the Greek government has made significant progress in unblocking major investment projects, reducing bureaucracy and improving the business environment. In 2019 Greece scored highly in the ‘Starting a Business’ World Bank indicator, ranking 11th of out 190 countries. Recent efforts to improve the functioning of the public administration by digitalizing its government agencies are positive, however, Greece’s digital performance, as measured by EC’s Digital Economy and Society Index (DESI) is still below the EU average. DBRS Morningstar views that the improvement in the political environment and government’s commitment to address Greece’s long standing challenges warrant 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 $18,168 in 2020. 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, significantly lower than its euro area peers. However, DBRS Morningstar notes Greece’s institutional strengths associated with euro system 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 can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments: https://www.dbrsmorningstar.com/research/375586.
EURO AREA RISK CATEGORY: LOW
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.
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 https://www.dbrsmorningstar.com/research/364527/ (July 27, 2020). Other applicable methodologies include DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/373262/ (February 3, 2021).
The sources of information used for this rating include Hellenic Statistical Authority, Bank of Greece (Financial Stability Review January 2021), Public Debt Management Agency (Funding Strategy for 2021, Bulletin No 100), Greek Ministry of Finance (National Budgetary Plan 2021, Strategic directions of the National Recovery and Resilience Plan November 2020 ), Eurostat, BIS, ECB, European Council: Consilium Europa, European Commission (Enhanced Surveillance Report – Greece, February 2021), IMF (Second Post-Program Monitoring Discussions—Press Release; Staff Report; Staff Statement; and Statement by the Executive Director For Greece (November 2020), World Economic Outlook October 2020), World Bank, UNDP, European Centre for Disease Prevention and Control, Social Progress Imperative, Global Carbon Project, The Digital Economy and Society Index (DESI), 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/375585.
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Nichola James, Managing Director, Co-Head of Sovereign Ratings,Global Sovereign Ratings
Rating Committee Chair: Thomas Torgerson, Managing Director, Co-Head of Sovereign Ratings,Global Sovereign Ratings
Initial Rating Date: August 16, 2013
Last Rating Date: October 23, 2020
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