Scope: Upgraded Greece’s outlook to positive
LAST UPDATE: 3/12/2022 – 00:11
Germany’s Scope confirmed the BB+ rating for Greece’s long-term credit rating but upgraded the outlook to positive from neutral.
At the same time, he now sees growth of 6% in 2022, sharply upgraded from the 4.9% he forecast in July, but also a reduction in the rate to 1.1% in 2023 from the 2.1% he previously estimated.
It forecasts year-on-year inflation to be 9.5% in 2022, easing to 5.4% in 2023 and finally to 2.4% in 2024.
Finally, the unemployment rate is set at 12.4% by 2022, falling to 12.1% in 2023 and 12% in 2024.
As the report states, Greece’s BB+ rating with a positive outlook reflects the following factors:
1. Strengthening of European support to Greece, which reflects the changes that occurred after the crisis of the corona virus pandemic in the support of vulnerable eurozone member states from monetary and fiscal policy interventions. This reflects, from 2020, innovations by the ECB with its bond-buying program and a relaxation of the rules that accompanied it to accept Greek bonds even though the lender was not investment grade. This support from the Eurosystem was further strengthened this year. Central bank measures, combined with the innovation of the EU’s collective fiscal plans, following the approval of Greece’s €30.5 billion recovery and resilience plan (13.4% of average 2021-26 GDP) , alongside the possibility of further long-term debt relief from European partners, demonstrates a more durable support for individuals beyond the coronavirus crisis, supporting debt sustainability and creating fiscal space for the government to spend on public investment.
2. Stronger than the increase in public debt reduction, due to high inflation, above potential real economic growth, low average interest cost of the existing debt portfolio and the expectation of primary fiscal surpluses until 2023.
3. Structural reforms that significantly reduced the highest rates of non-performing loans (NPLs) and substantially improved the stability of the banking system, alongside policies aligned with funding from the Recovery and Resilience Facility and the European Semester that mobilize investment and strengthen .
As the house reports, the revision of the outlook also reflects Scope’s updated assessments for Greece in the categories “domestic economic risk”, “fiscal risk” and “financial stability risk” and represents Scope’s opinion that the risks in the assessments of the states are generally bullish over the next 12-18 months.
However, Greece’s credit rating still faces challenges: firstly, high public debt, which represents continued weakness as markets reassess the risk to over-indebted eurozone borrowers amid rising inflation and central bank rate hikes; . bank. Scope would consider further substantial reductions in Greece’s debt ratio as a credit positive event. In addition, the gradual weakening of its strong debt structure, with higher refinancing costs, a gradual shift from public to private ownership of debt and shorter average maturities of new debt, poses a challenge.
Second, banking sector weaknesses related to reduced capital adequacy ratios, strengthened national bank interconnections and even higher NPLs compared to euro area averages reflect a credit weakness.
Finally, the structural weaknesses of the economy, in the form of average medium-term growth dynamics, high unemployment, limited economic diversification, market rigidity and a weak assessment of sectors that interact with the outside world.
As the house notes, long-term ratings could be upgraded by one notch in “investment grade” if, individually or simultaneously:
I) does maintaining European support to Greece strengthen the case for enhanced European institutional support for Greek debt markets and its debt sustainability after the upcoming elections and beyond the Covid-19 crisis? i) nominal growth and fiscal consolidation maintain strong and sustainable momentum against public debt (iii) the risks of the banking sector are further reduced, enhancing the provision of credit to the private sector and/or iv) limit structural economic and external imbalances, increasing medium-term growth potential and strengthening macroeconomic sustainability.
Instead, the outlook could be revised to “Stable” if, individually or in parallel: I) the Eurosystem’s support for the Greek debt was limited or proved ineffective, fueling tighter scenarios in the markets. i) fiscal policies remain loose for a longer period or a more severe economic downturn, blocking or reversing the current trajectory of the public debt ratio; (iii) risks to the banking sector intensify again, increasing the risk of contingent liabilities on the sovereign balance sheet and/or iv) commitment to reforms may weaken, such as after the 2023 elections, dampening prospects for curbing macroeconomic imbalances and undermining potential European support.
Recovery Fund and banks
In addition to ECB support, Greece’s creditworthiness is driven by EU fiscal policies. Greece is meeting the main Recovery Fund milestones of adopting structural reform conditions and implementing investment programs. The financing of the Recovery Fund for Greece amounts to 30.5 billion. EUR by 2026 (13.4% of 2021-26 average GDP – one of the highest such rates in the EU), with the majority of funding (EUR 17.8 billion) in grants and the rest in soft loans . This funding is linked to measures to modernize the economy and adapt to the climate crisis. About a quarter of the planned money has been disbursed in Greece to date, with approved investment plans amounting to 13.5 billion. euros, out of 1.7 billion euros have been disbursed to the owners of the projects.
The adoption of reforms, in cooperation with European partners, covered a wide range of policy areas, such as managing the socio-economic impact of the pandemic and facilitating the implementation of public investments. A reform of the insolvency framework came into force on 1 June 2021, after the framework for company restructuring and corporate bankruptcies came into force on 1 March 2021. The Hercules asset protection scheme completed its last securitizations until 2022, after its launch in December 2019. This program resulted in a substantial reduction in NPL ratios to 9.5% of total loans on a consolidated basis by June 20223, from 49.2% at the peak of June 2017 (and 40% by the end of 2019). All four systemic Greek banks will achieve the single-digit non-performing loan ratio target by the end of 2022.