DBRS Morningstar Confirms the Hellenic Republic at BB (high), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the Hellenic Republic’s Long-Term Foreign and Local Currency – Issuer Ratings at BB (high). At the same time, DBRS Morningstar confirmed the Hellenic Republic’s Short-Term Foreign and Local Currency – Issuer Ratings at R-3. The trends on all ratings remain Stable.

KEY RATING CONSIDERATIONS
The Stable trend reflects DBRS Morningstar’s view that Greece remains committed to ensuring fiscal and debt sustainability, despite the adverse global economic implications of Russia’s invasion of Ukraine. The strong rebound of tourism activity, which is expected to surpass the 2019 levels will help the economy this year, however, the economic uncertainty related to geopolitical events has surged. The main risks to the outlook are linked to growing inflationary pressures, monetary policy tightening, and a potential cut-off from Russian gas. Despite the decreasing dependence on Russian fossil fuels in recent years, Greece remains moderately exposed to Russian energy imports. However, the diversification efforts have intensified with the expansion of existing and the construction of new LNG facilities and the launch of a new natural gas pipeline. The tightening of monetary policies adds pressure on Greece’s borrowing costs, with Greek government bond (GGB) yields increasing recently to over 4.0% after recording historically low levels. In DBRS Morningstar’s view, Greece’s favourable debt profile, the high cash reserves and ECB support to GGBs in a situation of market disruption, help balance the risks.

Greece’s ratings are underpinned by its euro area membership and by the implementation of past economic reforms that have enhanced the resilience of the economy. Moreover, the country is set to receive around EUR 70 billion of funds from the Next Generation EU financial instrument and the Multiannual Financial Framework in the next years. Greece’s National Recovery and Resilience Plan (Greece 2.0) consists of reforms that if implemented could boost inclusive growth and investment, narrowing the investment gap between Greece and its euro area peers. Conversely, the ratings are constrained by the economic legacies inherited from Greece’s prolonged crisis, namely, the very high public debt ratio and still high non-performing loans in the banking system. In addition, low investment weighs on Greece's growth performance with the investment gap remaining high. Investment spending has fallen in the years of the crisis from 21% of GDP in 2009 to 12.8% in 2021, the lowest in the euro area and far from the average of 22.2%.

RATING DRIVERS
The ratings could be upgraded if one or a combination of the following occur: (1) continued implementation of reforms that boost investment, thereby improving longer term economic prospects; (2) sustained commitment to fiscal consolidation that keeps the public debt ratio on a downward trajectory.

Triggers for a downgrade include: (1) persistently weak economic performance; (2) a reversal or stalling in structural reforms; (3) renewed financial-sector instability.

RATING RATIONALE

Tourism Revenues and Government Support Measures Will Support the Greek Economy this Year

After experiencing a deep contraction in 2020, due to the coronavirus pandemic and the related restrictive measures, the Greek economy rebounded strongly in 2021. Real GDP grew by 8.3%, driven by strong investment and export growth and pent up private consumption. The fallout of the travel and tourism sector in 2020 was followed by a partial recovery in 2021, with travel receipts from tourism reaching around 60% of 2019 levels. Furthermore, the labour market continued to recover, with the unemployment rate falling below 13.0%.

The implications of the conflict in Ukraine have clouded the growth outlook. The main risks to the outlook are linked to growing inflationary pressures, which are expected to lead to weaker consumption. CPI inflation reached 11.4% YoY in August, driven primarily by energy prices, however, government support measures have alleviated the impact of elevated energy costs for households and businesses thus far. Greece remains moderately exposed to Russian energy imports. However, the diversification efforts have intensified with the expansion of existing and the construction of new LNG facilities and the launch of a new natural gas pipeline. In addition, continued improvements in the labour market and the strong performance of the tourism sector will cushion the effects of high inflation. Available data thus far point to a strong performance of the tourism sector this year, with travel receipts that will likely surpass the 2019 levels. The European Commission in its Summer 2022 outlook foresees growth of 4.0% in 2022 and 2.4% in 2023 revised downwards from previous forecasts (Winter 2022) of 4.9% in 2022 and 3.5% in 2023. However, the strong economic performance in the first half of 2022, with real GDP growing by 7.7% YoY will likely result in an upward revision. The Greek Ministry of Finance revised its real GDP growth forecast for this year from 3.1% to 5.3%.

The funds from the NGEU could have a significant positive impact on the Greek economy, which according to the estimates by the European Commission could increase real GDP by 2.1-3.3% by 2026, excluding the potential impact from the implementation of structural reforms under the plan. The plan consists of 106 investments and 68 reforms primarily focused in the green and digital transition. Greece will receive 17.8 billion euros in grants from which 4.0 billion have already be disbursed. In DBRS Morningstar’s view, the deployment of EU funds, combined with an expected continued implementation of structural reforms, will likely improve Greece’s growth prospects and warrants a positive qualitative assessment in the “Economic Structure and Performance” building block.

Fiscal Position is Improving, But Risks Remain Elevated

The reduction of revenues and the support packages to mitigate the economic impact of the pandemic led to a high fiscal deficit of 10% of GDP in 2020 from a surplus in 2019. A strong revenue performance underpinned by a better than anticipated growth outcome in 2021 and lower expenditures, resulted in a fiscal deficit of 7.4% of GDP compared to initial estimates of 9.6%. The primary deficit is projected to decline further from 5.0% of GDP in 2021 to 2.0% this year and to turn into a surplus from 2023 onwards. In response to increased energy costs the government has introduced support measures to mitigate the impact on households and businesses, which include subsidies for electricity and natural gas utility bills. As of September 2022 the total cost of the measures is estimated at around 3.8% of GDP, with the direct fiscal impact at 1.5% of GDP as it is partially covered by revenues from the Emissions Trading System (ETS).

Main risks to the fiscal outlook relate to a potential need for additional spending arising from higher than expected energy prices that will exceed the revenues from the ETS and the activation of state guarantees that were granted during the pandemic. Greece’s strong fiscal position before the pandemic supports DBRS Morningstar’s view that Greece maintains its commitment to fiscal consolidation and will comply fully with guidelines from the European institutions once targets are reinstated.

Public Debt Remains the Highest in the Euro area, But Favourable Structure Mitigates the Risks

Greece’s debt-to-GDP ratio fell to 193.3% in 2021 from 206.3% in 2020, and is forecast to drop further to 180.2% in 2022 mainly driven by the improved fiscal outcomes and high nominal growth. In its Stability Programme 2022-2025 the government envisages the public debt ratio to continue on its downward trend falling below 150% of GDP, recording a 59.8 percentage point decline since 2020 and falling below 2010 levels. Greek government bond yields after recording historical low levels last year with the 10-year yields falling to 0.5%, increased recently to around 4.0% in August 2022. However, there are several risk mitigating factors in place related to Greece’s favourable debt structure as the official sector holds 75% of government debt at end of 2021 with most of it is financed at very low interest rates. The debt has a very long weighted-average maturity of 20 years as of June 2022, with more than 98% of debt at fixed rates, mitigating the risks arising from increased market volatility. As of June 2022 the average effective interest rate on medium to long term debt stood at 1.3%.

In April 2022, Greece also fully repaid its IMF loans and will proceed with the pre-repayment of Greek Loan Facility (GLF) loans due in 2023, by the end of this year. Despite the favourable debt profile, DBRS Morningstar notes that Greece’s debt sustainability relies primarily on its ability to return to and sustain primary surpluses and solid nominal growth rates, as in the long run official sector debt will be replaced with market financed debt susceptible to market volatility. The sizeable cash reserves of around EUR 39 billion at end June 2022 continue to serve as a liquidity buffer and enhance confidence among market participants. These reserve buffers reduce repayment risks leading to a positive qualitative assessment in the “Debt and Liquidity” building block. Nevertheless, in DBRS Morningstar’s view fiscal discipline and the sustained growth will be key with respect to Greece’s debt sustainability.

Banks Make Progress on NPL Disposal, But Uncertainty Relates to New Flows

Greek banks made further progress in reducing their impaired assets, with the NPLs falling to EUR 17.7 billion at the end of Q1 2022 from EUR 47.3 billion in Q1 2021. The NPL ratio declined by around 18 percentage points to 12.1%. This reduction was primarily driven by sales and securitizations of loans under the Hercules Asset Protection Scheme (HAPS), operated by the four systemic banks, two of which had already achieved single-digit NPL ratios at the end of 2021. The systemic banks are currently on track to reach their targets for single digit NPL ratios by the end of 2022. In DBRS Morningstar’s view the balance sheet clean-up will continue although at a slower pace. At the same time the withdrawal of the pandemic support measures as well as the implications of the conflict in Ukraine could result in new NPE flows. This accounts for DBRS Morningstar’s negative qualitative assessment of the “Monetary Policy and Financial Stability” building block. As a result of the de-risking that took place in 2021, the Common Equity Tier 1 (CET1) ratio on a consolidated basis declined to 12.6% in December 2021 from 15.0% in December 2020. In DBRS Morningstar’s view with most of the clean-up process completed, banks should be in a good position to improve their capital position organically going forward (See DBRS Morningstar Greek Banks: H122 Shows Improved Credit Fundamentals, but Momentum Likely to Decelerate due to Slowing Economy https://www.dbrsmorningstar.com/research/401134/greek-banks-h122-shows-improved-credit-fundamentals-but-momentum-likely-to-decelerate-due-to-slowing-economy). Moreover, the banks are being tasked with lending on to Greek companies the majority of the RRF loan proceeds of up to EUR 12.7 billion, which will translate also into additional lending opportunities for the banks themselves. This will help the banks increase provision of credit to Greek corporates, thereby supporting economic recovery and growth.

Services Exports Expected To Be Supportive This Year

The current account deficit widened in 2020, reaching 7% of GDP, due to the significant deterioration in the travel balance. The partial recovery in the international travel flows and the strong performance in exports of goods improved the current account position slightly in 2021, with the deficit standing at 5.8%. Travel receipts recovered some of the losses in 2020 at around 60% of 2019 levels. Despite the strong performance of exports of services, due to the recovery in international tourist flows, the higher energy prices will result also in higher imports of goods, leaving the current account at the same levels this year. Nevertheless, Greece’s export performance has improved significantly since 2010, with Greek exports of goods increasing from 9.0% of GDP to 21.4% in 2021. However, the value-added of Greek goods exports remains low compared to its euro area peers. The tourism sector appears to be recovering strongly this year. International tourist arrivals for the period between January and June reached 85% of the same period in 2019. In August, data from EU commercial flights show a 5% increase in the commercial flights compared to 2019. The flow of EU transfers is also expected to have a positive impact on the external accounts. Greece’s net external liabilities remain high at 171.5% of GDP in Q1 2022 mostly reflecting public sector debt held by the official sector. The level is expected to remain at high levels because of the long-term horizon of foreign official-sector loans to the public sector.

RRF Provides Incentives for Continuation of Reforms

In recent years Greece enjoys a stable political environment and good cooperation with its EU peers and institutions. Significant progress has been made in reducing red tape in the public sector, improving the business environment and unblocking several investment projects. Greece has also accelerated its efforts to improve its digital performance, especially in the functioning of the public administration. Government priorities in the next few months focus on the successful implementation of the Greece 2.0 economic programme, with several reforms and investments in the pipeline. DBRS Morningstar views that the improvement in the political environment and the government’s commitment to address Greece’s long standing challenges warrants a positive qualitative assessment for the “Political Environment” building block. General elections will be held next year, with the most likely scenario two consecutive elections due to the change in the electoral law, which will lead to a fragmented parliament and will require multiple party cooperation. In DBRS Morningstar’s view policy continuity is expected with the RRF providing incentives for continuation of reforms.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Social (S) Factors
The Human Capital and Human Rights factor affects the ratings assigned. Greece’s GDP per capita of $20,255 in 2021 is relatively low compared with its euro system peers. This factor has been taken into account in the “Economic Structure and Performance” building block.

Governance (G) Factors
The Institutional Strength, Governance, and Transparency factor affects the ratings assigned. According to the World Bank Governance Indicators in 2020 Greece scores of 63 for Rule of Law and 69 for Government Effectiveness, significantly lower than its euro area peers in 2020. The Bribery, Corruption and Political Risks factor is also a relevant factor in the analysis. Greece underperforms the EU average in the ‘Control of Corruption’ indicator (58.7 percentile rank), however it has made good progress in recent years improving its score in the Corruption Perception Index from 36 in 2012 to 49 in 2021. 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 in the “Fiscal Management and Policy” and “Political Environment” building blocks.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments. https://www.dbrsmorningstar.com/research/402810.

EURO AREA RISK CATEGORY: LOW

Notes:
All figures are in euros (EUR) 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/401817/global-methodology-for-rating-sovereign-governments (August 29, 2022). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

The sources of information used for this rating include Ministry of Finance (Stability Programme 2022-2025), Hellenic Statistical Authority, Bank of Greece (Monetary Policy- 2021 - 2022), Public Debt Management Agency (Funding Strategy for 2022, Debt Bulletin 106), Eurostat, European Council: Consilium Europa, European Commission (Enhanced Surveillance Report – Greece, May 2022, 2022 Country Report – Greece, European Commission Summer 2022 Forecast, Assessment of the final national energy and climate plan of Greece, Analysis of the recovery and resilience plan of Greece June 2021), International Monetary Fund (Article IV Consultation (June 2022), World Economic Outlook April 2022), World Bank, European Central Bank, Bank for International Settlements, Social Progress Imperative, Global Carbon Project, 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://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/402809.

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: March 18, 2022

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