Morningstar DBRS Confirms the Hellenic Republic at BBB (low), Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed the Hellenic Republic (Greece)’s Long-Term Foreign and Local Currency – Issuer Ratings at BBB (low). At the same time, Morningstar DBRS confirmed Greece’s Short-Term Foreign and Local Currency – Issuer Ratings at R-2 (middle). The trends on all ratings remain Stable.

KEY CREDIT RATING CONSIDERATIONS
The Stable trend reflects Morningstar DBRS’ view that the risks to the credit ratings are balanced. Sound economic performance along with rising primary surpluses should help the public debt-to-GDP ratio to remain on steep downward trajectory going forward. Following strong GDP growth of 5.6% in 2022, Greece’s economic activity is moderating to around 2% and should remain above this level in the 2024-2025 period. Rising primary surpluses, projected above 2% of GDP in the same period, from 1.1% in 2023, will help the public debt as a share of GDP to decline below 150% of GDP in 2025, after the estimated 160% of GDP last year. Moreover, the implementation of structural reforms has been gaining strong momentum, which along with higher investments, supported by European Union (EU) resources, should raise GDP potential. Nevertheless, increasing geopolitical risks affecting trade, and a more severe than expected impact on the economy stemming from the current tight financing conditions, could result in slower growth and weaker public finances.

Greece’s BBB (low) credit ratings are underpinned by its EU and euro area membership and by the implementation of past economic reforms that have enhanced the resilience of the economy. The country continues to make progress on the execution of its Recovery and Resilience Plan (RRP or Greece 2.0), which consists of reforms that will boost inclusive growth and investment, thereby narrowing the investment gap between Greece and its euro area peers. Morningstar DBRS takes the view that EU resources will continue to provide incentives for the implementation of growth enhancing reforms, while supporting investment growth with funds also channeled through the strengthened banking system. The credit ratings are constrained by the economic legacies inherited from Greece’s prolonged crisis, namely, the very high public debt ratio, still sizeable level of non-performing loans (NPLs), and the high, although now close to single digit, unemployment rate.

CREDIT RATING DRIVERS
The credit 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 growth prospects; and (2) sustained commitment to fiscal responsibility, leading to a durable reduction in the public debt ratio. Potential triggers for a downgrade include one or a combination of the following: (1) a prolonged weakening of fiscal discipline that puts the public debt ratio on a sustained upward trend; (2) a reversal in structural reforms; and (3) renewed financial sector instability.

CREDIT RATING RATIONALE

Greek Economy Showed Resilience in 2023, Investment Will Continue to Support Growth

Post-pandemic economic performance has been remarkable in Greece. The country’s economic activity has continued to outperform the Euro area average since 2021. Despite an expected slowdown, this trend should continue going forward. Following a strong GDP growth of 5.6% in 2022, Greece’s GDP performance is estimated to have moderated to 2.0% last year, far outpacing the estimated 0.6% of the euro area. Despite the high inflation, tighter financing conditions, and the weaker external demand, the Greek economy showed resilience, supported by private consumption and investment. While last year’s severe floods had a significant impact on farmland, livestock, and infrastructure in the region of Thessaly, the overall impact on the Greek economy was contained due to the region’s small contribution to national GDP and the public funds allocated for reconstruction. This year, the European Commission (EC) expects growth to be 2.3%, with further progress with the implementation of the Greece 2.0 and rising real purchasing power boosting investment and consumption, respectively.

By utilizing both the grant and the loan component of the NGEU Greece continues to deliver on its RRP. This is helping the rise in investment to an estimated level of 14.1% of GDP at the end of 2023 from 10.7% in 2019, Moreover, also capital stock which had been declining since 2009, turned positive in 2022, and it is expected to continue to increase going forward. Thus far, Greece has received EUR 7.59 billion of grants and EUR 7.29 billion for the loan component while the total envelope is almost EUR 36 billion (16% of GDP) for reforms and investments. The deployment of EU funds combined with the implementation of structural reforms, will likely improve Greece’s growth prospects and warrants a positive qualitative adjustment to the Economic Structure and Performance building block assessment.

Commitment to Fiscal Responsibility Remains, With Primary Surplus Target Set at 2.1% in 2024

Greece’s fiscal accounts, after deteriorating due to the measures implemented to mitigate the impact of the pandemic and of the energy crisis, are improving rapidly. After peaking at 9.7% of GDP in 2020, deficit is now estimated to have declined to 2.1% in 2023. This reflects not only the impact of inflation but also government measures to fight tax evasion, which are driving fiscal overperformance. Primary balance returned to surplus in 2022 (0.1% of GDP) and was projected to have risen to 1.1% of GDP last year. This improvement comes despite the fiscal cost related to wildfires and floods. In 2023, the Greek government adopted several measures to address the economic and social consequences of the natural disasters as well as measures to improve its preparedness to such events. The government submitted a supplementary budget of EUR 600 million (0.3% of GDP) with an aid package that included emergency relief for households and businesses affected by the wildfires and floods and financial assistance for repairs, maintenance, and improvements of infrastructure.

In its 2024 State Budget the government forecasts a primary surplus of 2.1% of GDP this year, a 1.0 percentage point improvement from 2023, which is mainly driven by the phasing out of energy support measures and the one-off increases in expenditure related to natural disasters in 2023. Risks to the fiscal outlook remain and are related to slower growth that could lead to weaker fiscal revenues, a renewed energy and food price pressure that would require additional support measures, extreme climate-related events, and the impact on contingent liabilities. On the other hand, a persistent improvement in fiscal revenues thanks to government measures to increase tax compliance might deliver better-than-expected fiscal results. According to the International Monetary Fund (IMF), the share of informal economy has declined significantly from around 30% in 2013 to 16% in 2021, and this bodes well for fiscal capacity going forward.

Public Debt-to-GDP Ratio Remains the Highest in the Euro Area, But Favourable Structure And Proactive Debt Management Mitigate Risks

The Greek public debt ratio is expected to continue to fall, benefitting from rising primary surpluses, moderate interest rates, and high nominal growth. Greece’s debt-to-GDP ratio peaked at 206.3% of GDP in 2020 before declining to an estimated 160.3% in 2023. In its 2024 State Budget, the government envisaged the public debt ratio continuing on its downward trend, falling to 152.3% of GDP in 2024. and this would imply a 54 percentage point decline in four years. Greek government bond yields continue to benefit from favourable demand, with the 10-year spread over German Bunds at around 100 basis points. In Morningstar DBRS’ view, risks to public debt sustainability are mitigated by several factors. First, Greece’s debt structure is very favourable with 100% of debt at fixed rates after swaps. Moreover, the weighted average maturity is very high, slightly below 20 years as of end-2023, and more than 70% of the debt is held by the official sector, which makes the debt less susceptible to market volatility. Secondly, the Greek Public Debt Management Agency (PDMA) has been able to temporarily over-hedge its debt portfolio, mitigating the impact of the rise in interest costs. In 2024, the average effective interest rate on medium to long term debt is expected to stand at 1.3%.

Greece’s public debt benefits also from a proactive debt management strategy with early repayments that have reduced short-term debt and smoothed the redemption profile. For example, PDMA fully repaid its IMF loans and prepaid EUR 2.6 billion and EUR 5.3 billion of the Greek Loan Facility (GLF loans) in 2022 and in 2023, respectively. Should the primary surplus remain close to target, funding needs are expected to remain contained in the upcoming years, reducing refinancing risks.

The sizeable cash reserves of around EUR 33.6 billion (15% of GDP or three years of gross funding needs) at the end of 2023 continue to serve as a liquidity buffer and enhance confidence among market participants by reducing refinancing and interest rate risk. These reserve buffers, combined with the pro-active debt management strategy to achieve the lowest possible interest rate costs, thereby significantly reducing repayment risks, underpin the positive qualitative adjustment in the Debt and Liquidity building block assessment. However, despite the favourable debt profile, Morningstar DBRS notes that Greece’s debt sustainability relies primarily on its ability to sustain primary surpluses and on solid nominal GDP growth rates, as in the long run official sector debt will be replaced with market financed debt that will expose Greece to increased market volatility.

Significant Progress on NPL Reduction, RRF Should Support Growth in Lending to Non-Financial Corporations

Significant effort has been made to strengthen Greece’s banking sector, which, thanks to an improvement in credit quality, is now more resilient than in the past. Banks are better capitalized, liquid, and have increased their profitability, with the support of a rise in net interest margin. Moreover, an improvement in operating efficiency after a deep restructuring process, and a reduction in credit costs consistent with the improvement in their risk profile, further reinforced the banking system. The aggregate gross NPL ratio was at 7.9% as of Q3 2023, down more than 40 percentage points since its peak in June 2017. This reduction was primarily driven by sales and securitizations of loans under the Hercules Asset Protection Scheme (HAPS), which has benefitted from a public guarantee.

Over the last decade, loan growth has been subdued. However, Morningstar DBRS notes that banks’ effective management and allocation of RRF funds, together with the substantial reduction in NPLs that has taken place, positions banks well to increase the provision of credit to Greek corporates, thereby supporting economic growth. Under the Recovery and Resilience Facility (RRF), Greece will draw loans amounting to EUR 17.7 billion, of which EUR 16.7 billion will be channeled through Greek banks. So far only EUR 1.4 billion has been disbursed to firms but an acceleration is likely going forward. Nevertheless, the resolution of private non-performing exposures that were transferred from the banks’ balance sheets to the real economy and are now managed by credit servicing firms (CSFs), remain a key challenge. At the same time, the economic slowdown and high interest rate environment could affect banks’ loan portfolios adversely and result in new NPL inflow. These factors account for Morningstar DBRS’ negative qualitative adjustment in the Monetary Policy and Financial Stability building block assessment.

The health of the banking system has improved, enabling the Hellenic Financial Stability Fund (HFSF) to carry out important divestments of its shares in Greek banks. This reduces the nexus between banks and the sovereign and may attract private investor interest. Over time, the banking system has experienced an improvement in capitalization, even though capital quality remains negatively affected by the high share of deferred tax credits (declining, but still more than 50% of total prudential own funds). House prices have increased substantially over the past few years, reversing the decade-long downtrend but worsening affordability matrices. We view risks to financial stability as contained at the moment, and new macroprudential measures aimed at maintaining sound lending standards, including a cap on loan-to-value, are expected to kick-in in the near future.

Current Account Deficit Reverting Slowly in the Medium Term, FDI at Record Levels

Greece’s lingering deficit in goods balance and elevated negative Net International Investment Position (NIIP) weigh on the country’s external position and on the credit ratings. Going forward, these vulnerabilities are likely to decline with the trade deficit gradually narrowing while external debt falls as a result of net repayments.

Morningstar DBRS views Greece’s external position as more resilient than in the past. The country has improved its external competitiveness, has become a more open economy and exports of goods and services in terms of GDP have risen to slightly below 50% in 2022 from 22% in 2010. Moreover, the current account deficit, after temporarily widening in 2022 above 10% of GDP, declined to around 6.4% in 2023. The deficit has benefitted from normalising energy prices, and the strong rebound in tourism receipts, now 13% above the 2019 level. Over the medium-term, despite economic growth above the potential and high import of investment goods, the deficit in the current account should continue to narrow, with the IMF projecting the deficit to fall to around 5% of GDP in 2025. However, in Morningstar DBRS’ view, future improvements in the current account balance will also depend on the structural rise in export capacity. Supportive inflows of FDI, which reached a two decade high in 2022, and the NGEU funds should mitigate the funding risks stemming from elevated current account deficits.

Greece’s negative NIIP at around 140% of GDP as of Q3 2023, despite the fall of more than 40 percentage points since the peak in Q2 2021, remains very high. However, it is less of a concern in Morningstar DBRS’ view, since Greece benefits from a favourable debt structure reflecting a large share of liabilities in the hands of the official sector, with long maturity, mostly denominated in euro and at fixed rates. However, future significant declines are unlikely to occur soon because of the long-term horizon of foreign official-sector loans to the public sector.

Outright Majority Secures Policy Continuity to Take Advantage of the Strong Momentum on Reforms

Last year, national elections resulted in the New Democracy (ND) party, led by Kyriakos Mitsotakis, obtaining an absolute parliamentary majority. This secured policy continuity for the government to implement its policy agenda, at a time when Greece needs stability to fulfill the targets and milestones of its RRP, aiming to boost its economic prospects. Moreover, the government has reiterated its commitment to fiscal discipline setting a target for the government debt-to-GDP ratio at the end of 2024 at 152.3%. The successful implementation of the Greece 2.0 economic programme, with several reforms and investments in the pipeline, remains a key priority for the new government. Among others, the new government plans to address weaknesses in the justice system and strengthen the public health system, which along with improvements in education, will help Greece achieve longer term benefits. The improvement in the political environment and the government’s commitment to address Greece’s long standing challenges warrants a positive qualitative adjustment to the Political Environment building block assessment.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Environmental (E) Factors
There were no Environmental factors that had a significant or relevant effect on the credit analysis.

Social (S) Factors
The Human Capital and Human Rights factor affects the credit ratings assigned. Greece’s GDP per capita estimated at USD 23,173 in 2023 was 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 credit ratings assigned. According to the World Bank Governance Indicators, in 2022 Greece’s rank for both the Rule of Law (59.9 percentile) and for Government Effectiveness (66.5 percentile) were significantly lower than its euro area peers. The Bribery, Corruption and Political Risk factor is also a relevant factor to the credit ratings. Greece underperforms the EU average in the ‘Control of Corruption’ indicator (56.6 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 2022. Morningstar DBRS notes Greece’s institutional strengths associated with euro 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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) at https://dbrs.morningstar.com/research/427030/morningstar-dbrs-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/429115.

EURO AREA RISK CATEGORY: LOW

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 (6 October 2023) https://dbrs.morningstar.com/research/421590/global-methodology-for-rating-sovereign-governments. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings, in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for this credit rating include Ministry of Finance (Draft Budgetary Plan 2024 - October 2023, 2024 State Budget - October 2023), Hellenic Statistical Authority, Bank of Greece (Financial Stability Report 2023 – November 2023, Monetary Policy- Annual Report 2023, Note on the Greek Economy – March 2024)), Public Debt Management Agency (Funding Strategy for 2024 – December 2023, Debt Bulletin 112 – January 2024), Greece 2.0 National Recovery and Resilience Plan, Eurostat, European Council: Consilium Europa, European Commission (Post-Programme Surveillance Report - December 2023, 2023 Country Report on Greece – May 2023, 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 – January 2024, World Economic Outlook - October 2023, IMF Paper “Recent Trends of Informality in Greece: Evidence from Subnational Data” – February 2024), World Bank, European Central Bank, Bank for International Settlements, Social Progress Imperative, Global Carbon Project, Haver Analytics. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

Morningstar DBRS does not audit the information it receives in connection with the credit 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. Morningstar DBRS’ outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/429117.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Carlo Capuano, Senior Vice President, Credit Ratings, Global Sovereign Ratings.
Rating Committee Chair: Thomas R. Torgerson, Managing Director, Co-Head of Sovereign Ratings, Credit Ratings, Global Sovereign Ratings.
Initial Rating Date: 16 August, 2013
Last Rating Date: 8 September, 2023

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