Athens.- (GreekNewsOnline, Xinhua, ANA-MPA)
Rating agency Moody’s announced on Friday it has upgraded Greece’s sovereign credit rating by two notches to “B1” with a stable outlook, from the “B3” rating with a positive outlook it had granted Greece just over a year earlier. Economists expected this upgrade to assist Greece in its next foray in the markets, probably with a 10-year bond. Greek bond yields in the secondary market have already dropped to a decade-low, with the 10-year note’s rate standing at 3.65 percent on Friday.
Mood’s cited as three key drivers behind the upgrade
– the maturing reform programme
– a now firmly established track record of strong fiscal performance,
– public debt sustainability over the medium term enhanced by last June’s debt relief package.
Commenting this development, Greek Finance Minister Euclid Tsakalotos posted on his twitter account “Only a few hours after Mr. Staikouras’ (Christos, main opposition New Democracy’s shadow finance minister) remark that all the international reports confirm New Democracy’s criticism, Moody’s upgrades the Greek economy by two notches. Maybe the timing is neither ND’s nor Staikouras’
Government spokesman Dimitris Tzanakopoulos characterised the upgrade of Greece’s credit rating by Moody’s “a huge success, largely predetermined”.
Speaking to radio “Real FM” on Saturday, Tzanakopoulos said that the country is on a stability and invigoration of the growth dynamic course and the fiscal targets are met and for the first time an expansionary fiscal policy is implemented.
“The Greek economy is on recovery course and the people’s real life is improving, however we have a long way to cover to be able to create decent living conditions for all the citizens”, said Tzanakopoulos.
On the issue of the non-performing loans, he said that there are still some details that remain to be solved with the supervising institutions adding that the draft law will proceed normally without any problem.
Referring to the primary surpluses, he said that “for the first time we have the opportunity not only to meet our fiscal targets but to take measures of expansionary fiscal policy noting that the only government that could, after 2020, succeed a reduction on the primary surpluses would be a Tsipras (Prime Minister, Alexis) government.
“Greece benefits from the fact it has no open fronts at this stage and the international juncture is favorable, with the Italian crisis out of the way,” University of Athens Associate Professor of Economics Dimitris Kenourgios told Xinhua.
He added that the upgrade by Moody’s is set to benefit the Greek government’s plans for a full return to the markets, even if the country’s sovereign rating remains well below investment grade by all rating agencies.
“Tapping the markets with a 10-year note for just 2.5 billion to 3 billion euros (2.8 to 3.4 billion U.S. dollars) does not really make much of a difference for the economy. It is all to be done for appearances,” commented Giorgos Stratopoulos, a financial analyst at think tank E-Kyklos in Athens.
MOODY’S RATINGS RATIONALE
According to Moody’s report (https://www.moodys.com/research/Moodys-upgrades-Greeces-rating-to-B1-stable-outlook–PR_395805):
One key factor in the improvements of Greece’s credit profile in recent years has been the progress made in the adjustment programme of reforms agreed with Greece’s official-sector creditors. While progress has been halting at times, with targets delayed or missed, the reform momentum appears to be increasingly entrenched, with good prospects for further progress and low risk of reversal.
In Moody’s view, as well as speaking to the gradual strengthening of Greece’s institutions, the ongoing reform effort is slowly starting to bear fruit in the economy. Greece’s economy has become significantly more open in recent years, with exports now accounting for 37% of nominal GDP as of Q3 2018 compared to 22% back in 2010. Competitiveness has markedly improved, due to a significant reduction in labour costs, and exports of both goods and services have accelerated strongly during 2018.
Reforms in the labour market are starting to be reflected in strong employment growth, which has been running at 2% or above for the past three years, ahead of average nominal GDP growth for the period. According to data from the Bank of Greece and the Labour Ministry, employment contracts are becoming more flexible and wage bargaining is increasingly at the firm level, rather than at the sector or industry level as was historically the case. Making the labour market more flexible, shifting towards decentralized wage bargaining and reducing the traditionally high employment protection that acted as an obstacle to hiring in the first place have been key objectives of the labour market reforms enacted under the adjustment programmes.
Privatisations have recently been gaining pace and are a positive step towards bringing in foreign expertise, capital and investment as well as improving competition in domestic markets. The Hellenic Financial Stability Fund and the Bank of Greece have presented new proposals for accelerating the reduction of non-performing exposures in the banking sector, which — if implemented — could provide an important component for dealing more aggressively with the banks’ key weakness.
Moody’s positive assessment comes despite some recent government decisions that were not fully in line with commitments. In particular, the decision to increase the minimum wage by 11% exceeds the Experts Group’s recommendation of 5-10% and will damage Greece’s competitiveness if it translates into high wage increases more generally. Also, the recently released second post-program review report by the European Commission points out that despite overall good progress, Greece is lagging behind in enacting some of its specific commitments, and discussions on the important revision of the household insolvency law (so-called Katseli law) are ongoing. Continued delay could put the euro area’s promised transfer of close to €1 billion to Greece at risk.
That said, Moody’s considers the risk of a material reversal of already enacted reforms to be low irrespective of the outcome of the general elections which have to be held by October at the latest, but might be advanced by a few months. The most politically painful measures have already been enacted, with the economy finally showing signs of recovery, reducing the incentives for any future government to jeopardize the hard-won gains. Continued creditor surveillance should further reduce the risk of reform reversal.
SECOND DRIVER: FISCAL TRACK RECORD WELL-ESTABLISHED, MOSTLY DUE TO STRUCTURAL MEASURES
Reforms enacted, alongside recovering growth, have allowed Greece to achieve substantial fiscal consolidation over the past few years, with the primary balance now firmly in a large surplus position and the overall balance also in surplus for the past three years. Targets agreed with Greece’s euro area creditors have been exceeded, and by a wide margin since 2015. An important part of the fiscal improvement is due to structural measures undertaken during the third adjustment programme that ended in August 2018, including important pension and health care reforms as well as efforts to contain the public-sector wage bill and employment.
Moody’s also considers positively the establishment of the independent tax revenue administration IAPR in early 2017, which has already achieved important progress in improving tax compliance and raising tax revenues. An important contribution to the overall fiscal performance has come from the interest bill, which declined by over 16% since 2015, thanks to the debt relief measures granted by the euro area. Even assuming some market funding at higher rates going forward, the interest bill will remain broadly stable in the coming years at around 3% of GDP. All of these measures give confidence that Greece’s recent solid fiscal track record can be maintained over the coming years.
THIRD DRIVER: DEBT SUSTAINABILITY MATERIALLY ENHANCED OVER MEDIUM TERM FOLLOWING DEBT RELIEF LAST JUNE
Recent fiscal consolidation is underpinned by the debt relief package agreed with Greece’s euro area creditors last June, which materially reduces Greece’s debt repayments for the next decade and beyond. The package extended both the average maturity of EFSF loans (the largest part of Greece’s euro area funding, amounting to close to €131 billion or 70% of GDP) and the grace period on interest due by ten years. Greece will only have to start making payments on EFSF loans in 2033. This package in conjunction with continued solid fiscal performance will ensure that Greece’s gross financing needs will be low in the coming years, at around 10% of GDP until 2032. In addition, the euro area creditors committed to reviewing Greece’s debt profile again in 2032 and to provide further relief if needed (provided that Greece remains on track with its commitments). No other sovereign benefits from similar levels of support.
The Greek government subsequently returned successfully to the international bond markets. The proceeds of that issuance, along with a cash buffer of €26.8 billion or 14.5% of GDP as of end-2018, provide a sizeable cushion against amortizations of medium and long-term debt of a total of €22 billion over the coming three years. Debt sustainability is materially enhanced over the medium-term, with the public debt ratio declining even under Moody’s standard stress assumptions. In the rating agency’s baseline scenario the debt ratio will stand below 167% of GDP in 2020, compared to 181% last year. Moody’s forecasts a further decline in the debt to below 154% in 2022, assuming that the primary surplus targets are met.
RATIONALE FOR A STABLE OUTLOOK
The stable outlook balances the relatively low risk of policy or fiscal reversal against the limited upside to Greece’s credit profile.
Despite the significant improvements to date, Greece’ credit metrics are likely to remain commensurate with a rating in the B category in the coming years, absent significant, unexpected, further improvements in the country’s institutional strength and its economic performance. Medium term growth prospects will remain low unless investment accelerates significantly.
Higher investment in turn requires further reforms to improve the business climate and secure property rights as well as to move towards a more growth-friendly tax regime, while maintaining prudent fiscal policies at the same time. While the new proposals to clean up the banking sector’s non-performing exposures are promising, they need further detailed work before they can be implemented; more measures are needed clean up the sector’s balance sheet to promote lending to the real economy.
Also, while Greece managed to legislate many important reform measures over the past three years, those focused on institutional and behavioural change in particular will take time to be fully embedded and reflected in e.g. a more efficient and professional public administration, consistently strong tax compliance and more generally a change in the payment culture by the population at large.
WHAT COULD CHANGE THE RATING UP/DOWN
The rating could ultimately be upgraded if a strongly reform-minded government were to emerge from the upcoming elections and put in place a clear and credible agenda for further growth-friendly economic policies. A positive rating action would also require a faster-than-expected reduction in the public debt ratio — probably linked to sustained vigorous economic growth on the back of stronger investment — and a material improvement in the banking sector’s health.
Conversely, the rating could ultimately be downgraded were it to become clear that the reform momentum had dissipated, with previously enacted reforms being reversed or other policy steps being taken that lead to materially weaker fiscal outcomes or put in danger the hard-won competitiveness gains and institutional improvements. Moody’s will pay particular attention to the next government’s policy on public employment, given the importance of creating a less politicized public administration. Renewed tensions with Greece’s euro area partners would also be negative as this could, inter alia, put the prospect for further debt relief after 2032 — if needed — into doubt.
GDP per capita (PPP basis, US$): 27,796 (2017 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1.5% (2017 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 0.7% (2017 Actual)
Gen. Gov. Financial Balance/GDP: 0.8% (2017 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -1.8% (2017 Actual) (also known as External Balance)
External debt/GDP: [not available]
Level of economic development: Moderate level of economic resilience
Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.
On 26 February 2019, 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 materially increased. The issuer’s governance and/or management have materially increased. The issuer’s fiscal or financial strength, including its debt profile, has remained unchanged.
The principal methodology used in these ratings was Sovereign Bond Ratings published in November 2018. Please see the Rating Methodologies page on www.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.