Greece's local currency and foreign currency country ceilings remain unchanged at A1. 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 our view of de minimis exit risk from the euro area.
RATINGS RATIONALE
RATIONALE FOR CHANGING THE OUTLOOK TO POSITIVE
PROSPECTS OF SUSTAINED IMPROVEMENTS IN BANKING SECTOR HEALTH
We see an increased likelihood of sustained strengthening in banking sector health, which reduces contingent liability risks to the government.
The health of the Greek banking system has already significantly improved over recent years, and Greek banks are now closer to the EU average in many financial soundness indicators.
According to data from the European Banking Authority (EBA) for the first quarter of 2024, capitalization ratios are now close to the EU average, with a CET-1 ratio for the Greek banking system of 15.5% versus 16% for the EU-wide average. Profitability is stronger for Greek banks, and they show the lowest cost-income ratio in the EU.
While the non-performing loan (NPL) ratio is still above the EU average, prospects are good that it will be closer to the 1.9% EU-wide average over the next one to two years. The potential further reduction in the NPL ratio will benefit from the announced extension of the Hellenic Asset Protection Scheme (HAPS) by €1 billion (from the original €2 billion).
Signs of improved banking sector health and thus reduced contingent liability risks for the sovereign are also visible from the sale of the Hellenic Financial Stability Fund's (HFSF) stake in Piraeus Bank S.A. in March 2024, and plans to divest most of its stakes in National Bank of Greece S.A. before the end of the year.
Improved financial health for banks, if sustained, would position them better to face potential future shocks without raising contingent liability risks for the sovereign.
UPSIDE RISKS TO FISCAL PERFORMANCE
The Greek government has shown strong commitment to fiscal prudence and has implemented a set of fiscal reforms that have strengthened the revenue base over the past years, which could lead to higher primary surpluses and a faster decline in Greece's public debt burden than we currently anticipate.
Completed and ongoing revenue side reforms aim at improving tax collection efficiency, and reducing tax avoidance in the areas of personal and corporate income tax, as well as reducing the value-added tax (VAT) gap. Implemented measures include, among others, digitalization initiatives in the revenue collection authority, as well as electronic invoicing and real-time point-of-sale reporting.
During January to July this year, the State Budget showed strong increases in revenues, particularly for income taxes and VAT, underpinning the effectiveness of recent tax reforms. For the general government, the primary surplus in cash terms reached €5.2 billion (2.2% of GDP), up from €3.7 billion (1.7% of GDP) for the same period in 2023, as revenues grew faster than expenditures.
We project fiscal deficits of around 1% of GDP for the general government for 2024 to 2026, a further improvement from a deficit of 1.6% of GDP in 2023. Moreover, we expect primary surpluses of 2.2% of GDP between 2024 and 2026, outperforming the targets outlined in Greece's Stability Programme. We currently expect the debt burden to decline to below 150% of GDP by 2025 and to less than 140% of GDP by 2027.
Given the government's track record of outperforming its fiscal targets and the likelihood of further gains from revenue-side reforms, we see upside risks to fiscal performance. Higher primary surpluses – potentially in combination with stronger real and nominal GDP growth – would in turn support a faster reduction in the government's debt burden, albeit from very high levels.
RATIONALE FOR AFFIRMING THE Ba1 RATINGS
Greece 's Ba1 ratings are supported by a solid reform track record, which has led to visible improvements to institutions and governance, stronger investment and a healthier banking sector. In addition, the government is strongly committed to fiscal prudence.
Moderate economic strength reflects higher wealth levels than similarly-rated peers and robust growth prospects in the next three to five years, as substantial European Union (EU, Aaa stable) funds as well as private investment will support growth. For instance, under the EU's Recovery and Resilience Facility (RRF), Greece has access to €36 billion (about 16.3% of GDP in 2023) in grants and loans, of which almost half have been received so far from the European Commission and close to €6 billion have been disbursed to firms and projects.
These strengths are balanced by Greece's moderate economic size, and an economic model that relies heavily on consumption and services. Greece has potential for diversifying and growing the higher-tech manufacturing sector and exports, but progress will take time, and we expect comparatively large current account deficits of around 4-5% of GDP for the coming five years, as the recovery in investment will lead to strong import growth for capital and intermediate goods, and households' savings rate will only gradually improve.
Longer term challenges to potential growth arise from adverse demographics, which will only be partially compensated by the expected positive impact from RRF investments and reforms on productivity growth.
Despite our expectation of a further significant decline in Greece's debt burden, debt-to-GDP will remain above 120% well into the 2030s, a high level compared to sovereigns globally. That said, the favourable debt structure marked by long average term to maturity of around 20 years and concessionally low interest rates strongly support debt affordability metrics. The large cash buffer of around €35 billion (15% of GDP) is an important mitigant, too.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Greece's CIS-3 indicates that ESG considerations have a limited impact on the current rating, with potential for greater negative impact over time. In particular, this reflects exposure to social and environmental risks, such as adverse demographics and physical climate risks, with constrained financial capacity to fully 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 been solid in the context of the coronavirus pandemic and the energy crisis.
Greece's E-3 environmental issuer profile score reflects Greece's exposure to various environmental risks. Elevated physical climate risk is mainly due to high exposure to wildfires, heat and water stress.
Greece's S-4 social issuer profile score reflects predominantly an adverse demographic profile, which will weigh on the economy's long-term potential output growth.
Greece's G-2 governance issuer profile score reflects limited risks from governance considerations. Greece's scores in global governance surveys have been improving in the recent past, in particular with regards to regulatory quality and rule of law. Fiscal credibility has improved significantly, too.
GDP per capita (PPP basis, US$): 39,395 (2023) (also known as Per Capita Income)
Real GDP growth (% change): 2% (2023) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 3.8% (2023)
Gen. Gov. Financial Balance/GDP: -1.6% (2023) (also known as Fiscal Balance)
Current Account Balance/GDP: -6.3% (2023) (also known as External Balance)
External debt/GDP: [not available]
Economic resiliency: baa1
Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.
On 10 September 2024, 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 not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer has become less susceptible to event risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward pressure on Greece's Ba1 ratings could emerge under a scenario of continued improvements in banking system financial soundness indicators, accompanied by indications of a faster work-out of NPLs at servicers than we currently assume. Continued outperformance of fiscal targets compared with our expectations that lead to a faster reduction in the government debt burden than currently anticipated would also support a positive rating action. We acknowledge that significant improvements in areas like strengthening the judicial system's efficiency or diversifying the economy are unlikely over the outlook period, however, signs of accelerated reform implementation would be credit-positive.
The positive outlook signals that the ratings are unlikely to be downgraded in the near term. That said, downward pressures could emerge if the policy path seen over the past years was to be reversed, or if there were indications that past reforms are not delivering the boost to growth and fiscal accounts currently expected. In particular, signs of a sustained, material deterioration of the government's fiscal position, possibly combined with a sharp worsening of the banking sector's health would trigger a negative rating action. An escalation in the geopolitical situation in Europe involving NATO, although not our baseline, would also lead to downward pressure on the rating.
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