DBRS upgrades Greece on lower risk fears
DBRS Ratings has upgraded the Hellenic Republic’s longterm foreign and local currency issuer ratings to B from CCC (high), with the short-term foreign and local currency issuer ratings upgraded to R-4 from R-5. The trend on the long-term foreign and local currency ratings has been revised to Stable from Negative, and for the short-term foreign and local currency ratings it remains Stable.
The upgrade reflects DBRS’ view that the risk of Greece leaving the euro area and of further rounds of restructurings of privately-held debt has declined. In addition, progress in meeting fiscal targets under the economic and financial adjustment programme points to the likely continuation of support from the euro area creditors.
The slowdown in the pace of economic contraction and the expectation that GDP will start to grow again this year will help support debt reduction efforts, DBRS said, adding that banks’ reduced reliance on ECB liquidity and the improvement in the banking system’s capital buffers, as well as the stabilisation of the deposit base, also point to an improvement in financial conditions, albeit from very low levels.
Moreover, contingent on Greece’s progress on the fiscal and structural reforms front over the next 12 months, a restructuring of the officially-held loans in the run-up to the next general election could also support growth, debt sustainability, and put upward pressure on the rating.
The Stable trend reflects DBRS’ view that financial support from Eurozone partners and signs of macroeconomic stabilisation are balanced against several factors that continue to materially constrain the ratings. These include: (1) Greece’s elevated level of public sector debt; (2) the need to implement additional sizeable fiscal consolidation to keep the debt on a downward trajectory; (3) the weak performance of exports of goods despite the sharp drop in unit labour costs; (4) the high levels of non-performing loans; and (5) the country’s extremely high unemployment rate, which combined with austerity fatigue could undermine support for the adjustment programme. Factors which could put the rating under downward pressure include the recourse to Private Sector Involvement (PSI) as a means to reduce Greece’s funding needs over 2015-16 or the loss of the primary surplus due to a sluggish recovery or poor policy implementation as a result of the waning of political support for the programme.
Conversely, factors which could put upward pressure on the rating over the next few months include the provision of additional support by the euro area creditors and continued access to the sovereign bond markets at affordable yields which would allow Greece to close the financing gap in 2015-16 without involving any form of PSI.
As a result of the two assistance programmes from which Greece benefited since May 2010, a large share (81.2% at end 2013) of public debt is now in the hands of the official sector. With such a high share of its stock of debt, Greece benefits from a favourable debt maturity (15.8 years on average) and benign financing terms (2.4% effective interest rate in 2013).
In addition, the November 2012 decision by the Eurogroup to grant Greece a maturity extension on its EFSF and Greek Loan Facility (GLF) borrowing and to reduce by 100 basis points the interest rates paid on the GLF loans has contributed to a lowering of the debt servicing burden through the mid2020s. In addition, the Greek banking sector has benefited from the EUR 49.7bln backstop facility managed by the Hellenic Financial Stability Fund (HFSF). Following the publication of the results of the EU-wide banking sector stress tests later in the year, the government will be in a position to determine how much, if any of the funds remaining in the HFSF could be mobilised towards helping Greece close its financing gap.
Greece has made significant progress in rebalancing its economy as reflected in the delivery of the first current account surplus (at 0.7% of GDP) in over 60 years and the first primary balance in 11 years. Moreover, the primary balance reached a surplus, albeit a modest one at 0.8% of GDP.
Greece has also adopted a number of reforms meant to lift some of the rigidities that have long characterised the economy and which have likely depressed potential growth. Going forward, the government has signalled its commitment to implementing a further large number of the product market reforms identified by a recent OECD study in the areas of food processing, tourism, building materials, and retail. These concrete measures aim to liberalise the transport and rental markets, open up closed professions, and reduce social security contribution rates.