Greece: Positive Sovereign Credit Rating Trend Supported by Improvements in the Banking System

The ongoing progress in the Greek banking sector that enhances its resilience, was an important factor in the Trend change from Stable to Positive for the sovereign credit rating (Greece (BBB (low). A more resilient banking sector enables banks to further provide credit to the economy. The banking sector has reduced non-performing loans (NPLs) and improved the quality of its capital, thanks to a rise in profitability. We expect this progress to continue going forward. Moreover, the government, through the Hellenic Financial Stability Fund (HFSF), will likely continue its efforts to dispose of its remaining holdings in Greek banks, leading to a more diversified shareholder structure that reduces the interlinkages of the financial sector with the Greek sovereign. However, legacy vulnerabilities related to interlinkages, including the high amount of domestic government bonds on banks` books as well as large state guarantees, remain.

Key Highlights
-- Greek banking sector improvements are positive for the sovereign
-- The sale of government holdings in Greek banks reduces the link with the sovereign
-- Stronger profitability improves the quality of capital and reduces government contingent liabilities

"Continued efforts to make the banking sector more resilient and profitable are key in light of the successful allocation of the Recovery and Resilience Facility funds," said Spyridoula Tzima, Vice President of the Sovereign Group at Morningstar DBRS. "So far, the banking system has channeled only EUR 2.2 billion out of EUR 17.7 billion but we expect an acceleration going forward," said Carlo Capuano, Senior Vice President of the Sovereign Group at Morningstar DBRS.