DBRS Upgrades the Hellenic Republic to BB (low), Trend Changed to Stable

DBRS Ratings GmbH upgraded the Hellenic Republic’s Long-Term Foreign and Local Currency – Issuer Ratings to BB (low) from B (high) and changed the trend from Positive to Stable. At the same time, DBRS confirmed the Short-Term Foreign and Local Currency – Issuer Ratings at R-4 with a Stable trend.

KEY RATING CONSIDERATIONS

Since the last rating review Greece and the European institutions have successfully concluded the first and second Enhanced Surveillance monitoring reviews. The release of the first tranche of policy-contingent debt measures has been approved and a close to €1bn disbursement, including returning SMP/ANFA income, is pending. GDP growth is projected to strengthen to 2.3% this year from an estimated 1.9% in 2018. We expect the fiscal target for 2018 to have been exceeded. Moreover, Greece has returned to debt capital markets. The upgrade reflects these developments and relates to the following DBRS sovereign methodology building blocks: “Fiscal Management and Policy”; “Debt and Liquidity” and “Economic Structure and Performance”.

DBRS’s decision to change the trend from Positive to Stable reflects the likelihood that Greece will continue on its reform path including reducing banks’ non-performing exposures. DBRS anticipates continued positive assessments from the European institutions under the Enhanced Surveillance process, that should again activate the policy-contingent debt measures and continue to shore up confidence in capital markets. In addition, Greece is expected to pre-pay expensive IMF loans amounting to €3.6-3.7bn from €9.5bn in total, highlighting Greece’s pro-active debt management strategy. At the same time, the debt ratio remains at a very high level and achieving an appropriate fiscal mix, while at the same time delivering primary fiscal surpluses, remains a challenge in the medium term. In addition, non-performing exposures are currently at a very high level, restricting banks’ capacity to support the real economy.

RATING DRIVERS

Triggers for upward rating action include: (1) continued implementation of fiscal and structural reforms to support future economic growth; (2) compliance with post-programme monitoring; (3) consolidation of bond market access (4) continued improvement in the financial health of banks.
By contrast, triggers for downward rating action include: (1) a reversal or stalling in structural reforms; (2) material fiscal slippage (3) renewed financial-sector instability.
RATING RATIONALE

Economy Continues to Recover with a Strong External Sector and Private Consumption

The Greek economy continues to strengthen. Following 2.1% growth in 2017, real GDP growth reached 1.9% in 2018, underpinned by strong growth in exports of goods and services and higher private consumption. Real GDP growth is expected to reach 2.3% both in 2019 and in 2020 according to the Ministry of Finance. Private consumption is expected to remain a major growth driver in 2019 on the back of declining unemployment and rising disposable income. Export growth will continue to support growth, though at a more moderate pace, as the competitor tourism markets continue to recover. Supported by labour market reforms, employment has been growing and the unemployment rate has been falling, amounting to 18.5% in January 2019 from 20.9% in January 2018. However, it remains the highest in the EU. The recent increase in the minimum wage by 10.9%, despite the positive impact that it could have on domestic demand and growth in the short term, could have negative implications for employment in the medium term. DBRS considers that the continuation of the reform effort and the safeguarding of the reforms that have already been adopted, will support Greece’s ability to remain on a sustained growth path.

The Public Debt Ratio Has Peaked at a High Level, but Projections Point to a Steep Decline in Future Years

The debt ratio peaked at 181.1% in 2018. The IMF projects the debt ratio to fall steeply to 143.2% in 2024. To achieve this Greece will need an appropriate fiscal policy mix that includes primary surpluses. Mitigants to the high debt stock include the fact that EU institutions hold over 70% of government debt that contributes to the very long weighted-average maturity and most of the debt is financed at low fixed interest rates. In addition, at end-2018 Greece held a €26.8bn cash buffer equivalent to around two years of gross financing needs. Greece returned to debt capital markets this year and the liquidity buffer allows time for the restoration of full market confidence, while Greece implements growth supporting policies and fiscal consolidation.

In the longer term, the challenge of sustaining primary surplus over many years to meet debt service payments raises questions in the context of the high debt stock. A Eurogroup review of debt dynamics at the end of the EFSF grace period in 2032 to establish whether additional debt re-profiling is necessary, provides some comfort.

Greece Continues to Overperform on its Fiscal Targets

Since 2010, the country went through an unprecedented fiscal adjustment, with the cumulative improvement in the primary balance exceeding 11 percentage points by 2018. In 2018 Greece delivered a primary surplus of 4.4% of GDP well above the 3.5% target set by the programme. The primary surplus target until 2022 is set at 3.5% as agreed with the European institutions. Various reforms implemented during the economic adjustment programmes improved Greece’s fiscal management by modernizing the tax system and enhancing tax compliance. Notwithstanding the progress, the challenges for Greece’s fiscal sustainability remain. A pending court ruling on past wage and pension reforms could have negative fiscal implications if granted. DBRS considers that commitment to the structural reform agenda mitigates the risks to the fiscal outlook and safeguards Greece from potential fiscal shocks.
Continued Improvement in Greek Banks, but Still High NPEs

Greece’s banks’ underlying profitability continues to improve, helped by a more positive economic backdrop. However, high levels of impaired assets prevail, with a non-performing loan ratio of 45.4% at end-December 2018, according to data from the Bank of Greece. The new Household Insolvency Law should help banks reduce non-performing exposures (NPEs) as it sets tighter applicant eligibility criteria to obtain protection from foreclosure. In March this year, the four systemic banks submitted new operational targets to the Single Supervisory Mechanism (SSM), aiming to reduce more ambitiously their non-performing exposures by end-2021.

Two schemes are being considered to accelerate the reduction in banks’ non-performing exposures. The one proposed by the Bank of Greece entails the transfer of the banks’ NPEs along with part of their deferred tax credits to a special purpose vehicle (SPV), which will be financed through securitisation issues, with the objective of reducing the ratio to single digits within two to three years. The second plan, proposed by the Ministry of Finance and the Hellenic Financial Stability Fund (HFSF), involves NPE portfolio securitisations with government guarantees for senior tranches, similar to the GACS model in Italy.

The net flow of credit to the private sector has stabilized and the Bank Lending Survey (BLS) conducted by the Bank of Greece highlights increased demand in the first quarter of the year for corporate and household loans. The planned reduction in NPEs is expected to lead to an improvement in bank liquidity and eventually to help raise the supply of credit to the real economy.

Since the Crisis the External Imbalances Have Receded Substantially

Greece has improved its external position significantly since the beginning of the crisis, as its current account deficit narrowed by more over ten percentage points of GDP. In 2018, the current account deficit stood at 3.4% of GDP from 2.4% in 2017. The deterioration is partly due to weakening balance of goods, which was only partially offset by the improvement in the services balance. Greece’s exports of goods have increased by over 80% since 2009 in nominal terms. The services balance has also performed strongly. This is mainly attributed to the improvement in the travel balance with foreign arrivals increased by 11% in 2018 compared to the previous year.

Greece’s net external liabilities remain high at 138.3% of GDP in 2018, 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.

DBRS Expects a Broad Continuation of Existing Policies

Greece holds parliamentary elections every four years, with the next elections due by October 2019. The latest opinion polls show that the center-right, New Democracy is leading by almost 10 percentage points. Rebalancing the fiscal mix to support growth enhancing policies is expected to dominate the political debate. DBRS believes, that the increased political stability observed over the last few years is likely to be maintained and we do not expect any policy reversals under a potential New Democracy-led government. The Greek Parliament recently decided on a series of articles of the Constitution that will be revised by the next Parliamentary session. The most important amendment is the one that delinks the failure of the Parliament to appoint the President of the Republic from the premature dissolution of the Parliament. This decision will likely reduce the likelihood of early elections and increase the stability of the next government.

RATING COMMITTEE SUMMARY

The DBRS Sovereign Scorecard generates a result in the BB to B (high) range. The main points discussed during the Rating Committee include economic and fiscal performance, the political situation, the debt profile and debt management.

KEY INDICATORS

Fiscal Balance (% GDP): 1.1 (2018); 0.6 (2019F); 0.6 (2020F)
Gross Debt (% GDP): 181.1 (2018); 174.2 (2019F); 167.3 (2020F)
Nominal GDP (EUR billions): 184.7 (2018); 190.8 (2019F); 197.1 (2020F)
GDP per Capita (EUR): 17,264 (2018); 17,907 (2019F); 18,601(2020F)
Real GDP growth (%): 1.9 (2018); 2.3 (2019F); 2.3 (2020F)
Consumer Price Inflation (%): 0.8 (2018); 0.7 (2019F); 1.3 (2020F)
Domestic Credit (% GDP): 132.8 (2017); 124.1 (Sep-2018)
Current Account (% GDP): -3.4 (2018); -2.7 (2019F); -2.6 (2020F)
International Investment Position (% GDP): -140.9 (2017); -138.3 (2018)
Gross External Debt (% GDP): 224.6 (2017); 219.2 (2018)
Governance Indicator (percentile rank): 66.3 (2017)
Human Development Index: 0.87 (2017)

EURO AREA RISK CATEGORY: MEDIUM

Notes:

All figures are in Euros unless otherwise noted. Public finance statistics reported on a general government basis unless specified. Fiscal Balance (ELSTAT/EC), Gross Debt (ELSTAT/EC/IMF), Nominal GDP (ELSTAT/EC), GDP per Capita (ELSTAT/EC), Real GDP growth (ELSTAT/MoF), Consumer Price Inflation (EC), Domestic Credit (BoG), Current Account (BoG/IMF), International Investment Position (BoG), Gross External Debt (BoG). 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 at http://www.dbrs.com/about/methodologies. 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 at http://www.dbrs.com/ratingPolicies/list/name/rating+scales.

The sources of information used for this rating include 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.

DBRS 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.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings GmbH are subject to EU and US regulations only.

Lead Analyst: Nichola James, Co-Head of Sovereign Ratings, Global Sovereign Ratings.
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global FIG and Sovereign Ratings
Initial Rating Date: 16 August 2013
Last Rating Date: 2 November 2018

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