KEY RATING CONSIDERATIONS
DBRS views the Eurogroup statement with respect to the Hellenic Republic published on the 22nd June 2018 as warranting an extraordinary review of the sovereign rating. The subsequent upgrade is underpinned by new medium-term debt relief measures and clarification on the size of the liquidity backstop included therein. DBRS views the debt relief as being supportive of public debt repayment capacity in the medium term. Following completion of the European Stability Mechanism (ESM) Third Economic Adjustment Programme in August the liquidity backstop provides a precautionary funding buffer while Greece returns to bond issuance; and a portion of it is planned to be used to amortise debt.
The expected unprecedented activation of the European Commission’s (EC) quarterly reporting under the “Enhanced Surveillance” mechanism, in Greece’s case, linking additional beneficial financial measures to post programme policy commitments, is another positive rating factor. This should provide an additional incentive to encourage Greece to stay on course with structural reforms, thereby supporting economic growth. Improvements in the ‘Debt and Liquidity’ building block of our methodology underpin the upgrade.
The Positive trend reflects the likelihood that Greece will continue on its reform path under the enhanced surveillance mechanism and gradually return to market funding. The benefits of euro zone membership as demonstrated by EU institutional support to Greece since 2010, as well as marked progress with fiscal adjustment and structural reforms are credit strengths. Challenges include the still very high level of public debt and still weak banks’ asset quality.
Triggers for an upgrade include: (1) continued implementation of fiscal and structural reforms to support future economic growth; (2) compliance with post-programme monitoring; and (3) greater bond market access.
By contrast, a return to a Stable trend could stem from: (1) a reversal or stalling in structural reforms; (2) material fiscal slippage (3) renewed financial-sector instability.
Debt Sustainability is Partially Addressed with Official Sector Debt Relief
New measures announced by the Eurogroup include a further deferral of EFSF interest and amortizations by 10 years and an extension of the weighted average maturity by 10 years. In addition, and conditional on compliance with policy commitments and monitoring, the abolition of the step-up interest rate margin related to the debt buy-back tranche of the second Greek programme was outlined. As was the use of 2014 Security Markets Programme (SMP) profits from the ESM segregated account and the restoration of the transfer of ANFA and SMP income equivalent amounts – if conditions are met to be disbursed in equal portions on a semi-annual basis in December and June from 2018 to June 2022.
The new debt measures improve the EC’s projections of debt and gross financing needs (GFN) (% of GDP) under a baseline and adverse scenario. In the baseline scenario, from 188.6% in 2018 the debt ratio declines to 96.8% in 2060 compared with 127% prior to the measures. Moreover, the measures extend the time period the GFN remains below the 15% benchmark. The GFN ratio lies below the 20% longer term benchmark throughout the forecast period with the new measures. A cash buffer of €24bn accounting for almost two years of Greece’s debt repayment needs provides a key backstop. This allows time for Greece to demonstrate continuation of policies that are supportive to growth raising confidence in the government’s ability to stay on track. €5.5bn of the final programme tranche of €15bn is set-aside for amortization.
Completion of the Fourth and Final Review to Increase Confidence, Supporting Additional Improvement in the Banks
Economic confidence is supported by the successful conclusion of the fourth and final review, as has been the case with past review completions. After a prolonged period of recession, the Greek economy moved to expansionary territory in 2017, with real GDP increasing by 1.4%. The main drivers were goods and services exports and investment, while consumption and goods and services imports had a negative impact on growth. The growth rate was below the 1.8% estimated by the government in the 2018 budget, however, it is the strongest growth Greece recorded in its decade-long crisis.
The 2.3% growth in the first quarter of this year, due to stronger growth in exports of goods and services, suggests that the gradual recovery is strengthening. According to the European Commission, real GDP is expected to reach 1.9% this year with private consumption and investment being the main contributors, on the back of the significant improvement in the labour market and the business climate. On the back of the labour market reforms, employment has been growing and the unemployment rate has been falling amounting to 20.1% in March 2018, however, it remains the highest in the EU. DBRS considers that the continuation of the reform effort and safeguarding the reforms that have already been adopted, will support Greece’s ability to remain on a sustained growth path.
Greece’s banks’ profitability continues to improve helped by more positive economic developments. However, high levels of impaired assets prevail, with a non-performing exposure ratio of 43.1% at end-December 2017. This year, reduced reliance on the ECB’s Emergency Liquidity Assistance (ELA) is reflected in the decline in the ceiling from €24.8bn in mid-December to €10.9bn according to most recent data. This demonstrates banks’ improved liquidity including access to wholesale markets. Also, deposits placed by the private sector increased at an annual rate of 7.4% in May. Capital controls introduced in June 2015 have been eased; credit to the domestic private sector is stabilising. The waiver related to the use of Greek bonds as collateral for financing operations with the ECB is to be reviewed by the end of the programme in August, but estimates suggest that if it is withdrawn, banks should fill the gap with repatriating deposits, secured interbank funding, or if necessary, with more expensive ELA. It is possible that the enhanced surveillance to be put in place will support a decision on the continuation of the waiver.
Stronger GDP Boosts Employment Growth to Help Achieve Primary Fiscal Surplus
Greece has managed to restore its fiscal sustainability. Since 2010, it went through an unprecedented fiscal adjustment, with the cumulative improvement in the primary balance exceeding 16 percentage points in 2017. For a second consecutive year Greece delivered a primary surplus of 4.2% well above the 1.75% target set by the programme. The target for the primary surplus is set at 3.5% a year in 2019-2022. DBRS considers that the fiscal reforms undertaken under the adjustment programmes have restored Greece’s fiscal sustainability, however its durability is contingent on the sustained economy recovery.
Since the Crisis the External Imbalances Have Receded Substantially
Greece’s current account deficit has been on an improving trend, falling by almost 12 percentage points since 2009. The current account deficit in 2017 was 0.8% of GDP compared with a deficit high of 12.3% of GDP in 2009. In 2018, the current account is expected to be around the 2017 levels, supported by the strong performance of exports of goods and services. Greece’s exports of goods have increased by 58% since 2009 in nominal terms. The strong services balance also contributed, increasing to a surplus of 9.8% of GDP in 2017 from a surplus of 4.8% of GDP in 2009. This is mainly attributed to the improvement in the travel balance, with tourist revenues increasing by 10.8% in 2017 due to an increase in the number of inbound visitors and a rise in the expenditure per trip. Foreign arrivals increased by 9.7% in 2017 and are expected to grow even more strongly in 2018 mainly driven by increased air connectivity and the extension of the tourist season.
From a stock perspective, Greece’s negative net international investment position (NIIP) remains high at 141.4% of GDP at end-2017 up from 88.8% in 2011, mostly reflecting public sector external debt. It is expected to remain at high levels because of the long-term horizon of foreign official-sector loans to the public sector. A current account close to balance, if sustained, should prevent a material deterioration in the external borrowing position.
DBRS Currently Sees a Durable Commitment to Reforms
Greece’s political landscape changed drastically during the crisis years, resulting in five national elections, eight prime ministers and four coalition governments. The SYRIZA-ANEL coalition government elected in September 2015, despite the slim parliamentary majority, is the longest-serving since the onset of the debt crisis in 2009. However, the legislation of a number of unpopular measures had a negative impact on popular support for SYRIZA. The latest opinion polls show that the center-right, New Democracy is leading by almost 10 percentage points. DBRS believes, that the increased political stability observed over the last two years is likely to be maintained after the end of the current adjustment programme and we do not expect any policy reversals under a potential New Democracy-led government.
RATING COMMITTEE SUMMARY
The DBRS Sovereign Scorecard generates a result in the BB (high) – BB (low) range. Additional considerations factored into the Rating Committee decision include the high debt stock and the political challenge of remaining on track with the fiscal and reform agenda. The main points discussed during the Rating Committee include the impact of the 22 June Eurogroup statement on debt relief and the cash buffer, as well as recent economic and financial trends.
Fiscal Balance (% GDP): 0.8 (2017); 0.8 (2018F); 0.9 (2019F)
Gross Debt (% GDP): 178.6 (2017); 179.5 (2018F); 177.9 (2019F)
Nominal GDP (EUR billions): 177.2 (2017); 184.8 (2018F); 192.4 (2019F)
GDP per Capita (EUR): 16,641 (2017); 17,307 (2018F); 18,120 (2019F)
Real GDP growth (%): 1.4 (2017); 1.9 (2018F); 2.3 (2019F)
Consumer Price Inflation (%): 1.1 (2017); 0.7 (2018F); 1.1 (2019F)
Domestic Credit (% GDP): 132.0 (Sep-2017)
Current Account (% GDP): -1.1 (2017); -0.8 (2018F); -0.6 (2019F)
International Investment Position (% GDP): -139.5 (2016); -141.4 (2017)
Gross External Debt (% GDP): 248.2 (2016); 228.6 (2017)
Governance Indicator (percentile rank): 62.5 (2016)
Human Development Index: 0.87 (2015)
All figures are in Euros unless otherwise noted. Public finance statistics reported on a general government basis unless specified. Governance indicator represents an average percentile rank (0-100) from Rule of Law, Voice and Accountability and Government Effectiveness indicators (all World Bank). Human Development Index (UNDP) ranges from 0-1, with 1 representing a very high level of human development.
The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website www.dbrs.com here. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website here.
The sources of information used for this rating include the IMF, World Bank, UNDP, Haver Analytics, Bank of Greece, PDMA, Greek Ministry of Finance, Eurostat, ECB, European Council: Consilium Europa, European Commission. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.