Research: Rating Action: Moody’s affirms Greece’s Ba3 ratings, changes outlook to positive from stable

Frankfurt am Main, March 17, 2023 — Moody’s Investors Service (Moody’s) has today changed the Government of Greece’s outlook to positive from stable and affirmed the local currency (LC) and foreign currency (FC) long-term issuer and LC senior unsecured ratings at Ba3. Moody’s has also affirmed the FC senior unsecured shelf and MTN programme ratings at (P)Ba3, the LC commercial paper rating at Not Prime (NP), and the FC other short-term rating at (P)NP.

The main drivers for the outlook change to positive are prospects of a period of higher nominal GDP growth than in the past decade, partly the result of improvements in governance and effective past economic and banking sector reforms which are more visibly bearing fruit. Together with continued commitment to sound fiscal metrics supported by the implementation of fiscal measures, higher nominal GDP growth will contribute to a marked decline in Greece’s debt burden in the next few years.

The affirmation of Greece’s Ba3 ratings reflects a balance between the improvements seen in many areas of Greece’s credit profile with persisting challenges. In particular, further reforms in the areas of justice, education, business environment and labour markets would support a higher rating. Moreover, the government debt burden remains very high and supported by official creditors, with future improvements and full return to market-based financing involving the maintenance of large primary surpluses for years to come.

Greece’s local and foreign currency country ceilings remain unchanged at A3. For euro area countries a six-notch gap between the local currency ceiling and the local currency issuer rating as well as a zero-notch gap between the local currency ceiling and foreign currency ceiling is typical, reflecting benefits from the euro area’s strong common institutional, legal and regulatory framework, as well as liquidity support and other crisis management mechanisms. It also reflects Moody’s view of de minimis exit risk from the euro area.

RATINGS RATIONALE

RATIONALE FOR CHANGING THE OUTLOOK TO POSITIVE FROM STABLE

MORE ROBUST NOMINAL GDP GROWTH OUTLOOK

Over the coming years, Greece’s real GDP growth will be supported by investment, both through European Union (EU, Aaa stable) funds and private investment. Together with the effects of past reforms – for instance reflected in an improved business environment – and continued structural reforms, including improving public sector and judicial efficiency, this is likely to lift potential growth to 2% to 3% over the coming five years, and support long-term potential growth. In addition, and in contrast to the decade until 2020, as excess economic capacity is absorbed, disinflationary and deflationary pressures will recede and moderate inflation will support nominal GDP growth.  

Greece has recovered quickly from the pandemic and weathered the energy crisis well, highlighting its overall economic resilience. Real GDP grew by 5.9% in 2022, after 8.4% in 2021.[1] Strong growth was mainly driven by very strong tourism, domestic consumption and investment. The better-than-feared energy situation in Europe will support growth in Greece, which Moody’s forecasts at around 1.8% in 2023 and 2024, mainly driven by robust consumption and continued strong growth in investment.

Moreover, the NextGeneration EU (NGEU) framework will support investment and continued reforms in areas like energy transition, digitalization, and productivity and competitiveness-enhancing growth areas. Under the NGEU’s Recovery and Resilience Facility (RRF), Greece has access to €30.5 billion in total (18% of 2021 nominal GDP split into €12.7 billion in loans and €17.8 billion in grants). Greece is among the frontrunners in implementing its national recovery and resilience plan (NRRP), with more than €11 billion already disbursed. Together with inflows from the regular EU budget this will more than double public investment to €14 billion per year during 2023-26 compared to the average before 2020. Moody’s estimates that Greece could see a boost to its potential growth rate of around 0.4 percentage points annually by 2030.

Combined with inflation at moderate but positive levels, once the current energy price shock recedes, Moody’s expects nominal GDP growth at around 4-6% in the next few years, compared to below 2% and often negative growth rates in the decade to 2020.

SUSTAINED IMPROVEMENTS IN THE BANKING SYSTEM

Greek banks significantly reduced legacy non-performing exposures (NPE) in 2021 and 2022, mainly through securitisations with the government’s asset protection scheme (Hercules) that helped clear banks’ balance sheets from bad assets. The Hercules scheme was introduced in late 2019 and officially ended in October 2022. As of the end of 2022, total government guarantees under the scheme amounted to €17.9 billion (8.6% of GDP).[2] Moody’s estimates that the average weighted NPE ratio for the four systemically important Greek banks reached 6.3% of gross loans in December 2022, suggesting a further decline in the system-wide ratio which was 9.1% at the end of the third quarter of 2022, compared to a peak of 49% in December 2016.[3]

Greek banks’ margins and net interest income will benefit from higher interest rates and new corporate lending, which will mitigate the impact from NPE sales that reduced loan balances in the last couple of years. Accordingly, Moody’s expects banks’ profitability to improve, supported also by higher fee income, cost containment (balanced by ongoing investment in technological innovation) and modest loan loss provisions over the next 12-18 months. Improved profitability will support banks’ internal capital generation through retained profits, despite the potential for modest dividend payments in 2024. In turn, improvements in banks’ financial health will allow them to support credit growth and economic activity.

RAPID DECLINE IN GREECE’S GOVERNMENT DEBT BURDEN

More robust nominal GDP growth will set the conditions for Greece’s government debt burden to fall markedly in the next few years. In addition, a return to primary surpluses, helped by the economic recovery and fiscal consolidation, will also reduce the debt burden. Between 2021 and 2023, Moody’s projects for Greece one of the largest reduction in the debt burden of all rated sovereigns and the largest among advanced economies and euro area members, with government debt declining to 162% of GDP in 2023 from 194.5% reported in 2021.[4] Overall, government debt to GDP should fall to less than 150% of GDP by 2026.

Moody’s estimates that Greece’s fiscal deficit narrowed significantly last year, to 3.2% of GDP from 7.5% in 2021. For 2023, Moody’s forecasts a further improvement in the budget deficit to -1.5% of GDP and a primary surplus of 1.2% of GDP in 2023. Primary surpluses will rise to around 2% from 2024, driven by a normalization of spending levels to below 50% of GDP mainly as a result of reduced subsidy and transfer payments as temporary support measures are phased out. At the same time, Moody’s projections take into account slower growth in revenues because of the permanent  reduction in social security contributions and the abolition of the solidarity surcharge.

Maintaining solid primary surpluses in the medium term will in part result from the improvement in Greece’s institutions and governance strength. Commitment to continued fiscal consolidation is credible and implementation of structural reforms has already brought tangible progress in areas including tax administration and compliance, which in Moody’s view reflects an improved quality of legislative and executive institutions.

RATIONALE FOR AFFIRMING THE RATING AT Ba3

Greece’s Ba3 rating is supported by robust economic strength in a global context, albeit with some weaknesses. Greece’s relatively high wealth levels are balanced by the moderate size of the economy and equally moderate level of economic diversification and complexity. Unemployment rates have declined significantly to 12.4% in 2022 from 14.8% in 2021,[5] but youth unemployment remains high and the informal sector continues to play a significant role in the economy. Income inequality is above the EU average, and despite improvements since 2015, the share of persons at risk of poverty is comparatively high. Greece also faces a highly adverse demographic profile, which will weigh on potential growth.

Despite significant improvements over the past ten years, Moody’s assessment of Greece’s institutional strength is still negatively affected by the government’s restructuring of private-sector debt in 2012. Control of corruption and improving the quality and efficiency of the judiciary remain a challenging area, with negative implications for the business and investment environment in case of slowing reform momentum or reversal of decisions.

Greece will still have one of the highest debt burdens globally over the next 3-5 years, notwithstanding the expected significant reduction. Large and repeated debt relief provided by Greece’s euro area creditors is reflected in debt affordability metrics (interest payments in relation to GDP and government revenue) which are significantly stronger than what the debt burden metrics would suggest.

Greece’s susceptibility to event risk remains determined by risks related to the banking sector. Despite significant improvements there are still weaknesses which combined with the relatively large size pose a large potential contingent liability that could crystallize on the government’s balance sheet. The favourable government debt structure, marked by a long average term to maturity of about 20 years, together with Greece’s large cash buffer are important mitigants and shield the credit profile from rising interest rates.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Greece’s ESG Credit Impact Score is moderately negative (CIS-3), mainly reflecting social risks, and moderately negative exposure to environmental risks, with constrained financial capacity to mitigate these risks. However, Greece’s governance and institutions have been improving over the past several years and the authorities’ capacity to respond to shocks has shown to be solid in the context of the coronavirus pandemic and the energy crisis.

Greece’s overall E issuer profile score is moderately negative (E-3). With the exception of waste and pollution and carbon transition, Moody’s scores Greece’s exposure to the various E risks at moderately negative. Greece experienced its worst wildfires in decades in 2021, highlighting credit risks from climate change. Although Greece can count on solid financial support from the EU to limit the financial impact of environmental problems, a further increase in the frequency and severity of these events could weaken its tourism industry. In addition, environmental damage and a potential decrease in property tax bases pose longer-term credit challenges for local governments.

Moody’s assesses Greece’s S issuer profile score as highly negative (S-4), reflecting an adverse demographic profile, significant emigration of the highly-qualified and the young over the past several years as well as still high unemployment rates (although they have been declining recently). Access to housing, healthcare and basic services is generally good. Substantive pension reforms over the past several years limit the fiscal impact of the adverse demographic profile, while ongoing labour market and education reforms should improve the functioning of the labour market, providing important mitigants for the above mentioned social risks.

Greece’s G issuer profile score is neutral-to-low (G-2). Greece’s scores in global surveys have been improving in the recent past, in particular with regards to regulatory quality and rule of law. Fiscal credibility has improved significantly, and Greece benefits from significant technical support from the EU. Although Greece has exited the Enhanced Surveillance on 20 August 2022, the country remains in post-programme monitoring and subject to normal European Semester procedures, which will help to fully embed recent governance and institutional improvements.

GDP per capita (PPP basis, US$): 32,230 (2021) (also known as Per Capita Income)

Real GDP growth (% change): 8.4% (2021) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 4.4% (2021)

Gen. Gov. Financial Balance/GDP: -7.5% (2021) (also known as Fiscal Balance)

Current Account Balance/GDP: -6.8% (2021) (also known as External Balance)

External debt/GDP: [not available]

Economic resiliency: baa2

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 14 March 2023, a rating committee was called to discuss the rating of the Greece, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have not materially changed. The issuer’s institutions and governance strength, have materially increased. The issuer’s fiscal or financial strength, including its debt profile, has materially increased. Other views raised included: The issuer’s susceptibility to event risks has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

WHAT COULD CHANGE THE RATINGS UP

A continuation of economic policies and commitment to fiscal consolidation pointing to faster improvements in economic competitiveness and/or a faster improvement in fiscal strength than in Moody’s baseline scenario would support a higher rating. Further improvements in the banking sector, bringing asset quality and capitalization closer to the euro area average, would also be credit positive.

WHAT COULD CHANGE THE RATINGS DOWN

The positive outlook signals that a rating downgrade is unlikely in the near term. However, a protracted period of heightened political uncertainty that points to a potential reversal of the policy path seen over the past years, weighing on business sentiment and investment  could move the outlook back to stable. A sustained, material deterioration of the government’s fiscal position in combination with a sharp deterioration of the banking sector’s health would trigger a negative rating action. An escalation in the geopolitical situation in Europe involving NATO would also likely lead to downward pressure on the rating.

The principal methodology used in these ratings was Sovereigns published in November 2022 and available at https://ratings.moodys.com/api/rmc-documents/395819. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

REFERENCES/CITATIONS

[1] Elstat 14-Mar-2023

[2] PDMA 14-Mar-2023

[3] Bank of Greece 14-Mar-2023

[4] Eurostat 14-Mar-2023

[5] Elstat 14-Mar-2023

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Steffen Dyck
Senior Vice President
Sovereign Risk Group
Moody’s Deutschland GmbH
An der Welle 5
Frankfurt am Main, 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Dietmar Hornung
Associate Managing Director
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody’s Deutschland GmbH
An der Welle 5
Frankfurt am Main, 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454