Greece’s bailout programme provides credit support but economic and fiscal challenges still elevated
Conditions in Greece have stabilised under the third bailout programme and support the stable outlook on Greece’s Caa3 rating. However the implementation risks linked to the bailout conditions are still high, underscoring the country’s economic and fiscal challenges, Moody’s Investors Service said in its annual Credit Analysis on Greece on Tuesday.
Greece successfully concluded the first review of its third bailout programme in June. However, the implementation risks associated with the bailout package remain elevated, given the government’s slim majority in parliament and the weak track record and capacity of administration to execute reforms.
Moody’s forecasts that the Greek economy will contract by 0.7% of GDP this year, before returning to growth estimated at 1.8% in 2017. In the short-term much will depend on the timely clearance of government arrears to the private sector, which stand at EUR5.5 billion as of April 2016 (3% of GDP).
The outcome of the election in September 2015 and the successful conclusion of the first review of Greece’s third bailout programme in June 2016 the public legislated mean that the risk of scenarios involving either an impasse with official creditors and/or a deeper recession resulting from prolonged uncertainty has diminished somewhat.
Moody’s expects that Greece’s general government debt ratio will peak this year at 182.8% of GDP. While the level is high, the structure of Greek public debt and debt-servicing requirements remain benign.
Upside potential could stem from further official sector debt restructuring, which will only be considered after the current bailout programme expires, and remains contingent on both euro area approval and the Greek government’s ability to successfully i mplement the agreed fiscal and structural reforms.
Moreover, the banking sector remains weak. Although banks have recently been recapitalized, asset quality challenges remain a concern. Moody’s expects an increase in non-performing loans in 2016, reaching close to around 40%.
Poor asset quality in the financial sector will likely cause investment growth to remain low. As a result, consumption and net exports will continue to drive economic activity.