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Rating Action:

Moody's upgrades Greece's rating to B1, stable outlook

01 Mar 2019

London, 01 March 2019 -- Moody's Investors Service ("Moody's") has today upgraded Government of Greece's local and foreign currency issuer ratings to B1 from B3 previously. Moody's has also upgraded the local currency senior unsecured debt rating to B1 from B3, as well as the foreign currency senior unsecured MTN programme and senior unsecured shelf ratings to (P)B1 from (P)B3. The local currency Commercial Paper rating and the foreign currency other short-term rating have been affirmed at Not Prime (NP) and (P)NP respectively.

The outlook has been changed to stable from positive.

The key drivers for today's rating action are the following:

1. The reform programme appears firmly entrenched and reforms implemented are starting to bear fruit. A strengthening economy in conjunction with creditor surveillance should further reduce risk of reform reversal.

2. The track record of strong fiscal performance is now firmly established and is likely to be sustained, as most of the fiscal improvement is due to structural measures;

3. Public debt sustainability is materially enhanced over the medium term by last June's debt relief package. Sovereign has successfully re-established market-based funding, supported by very large cash cushion and strong creditor support.

Moody's has also raised the foreign-currency and local-currency bond ceilings to Baa1 from Ba2 previously. The foreign-currency short-term bond ceiling has been raised to Prime-2 from Not-Prime. The foreign-currrency and local-currency deposit ceilings have been raised to B1 from B3. The foreign-currency short-term deposit ceiling has remained unchanged at Not-Prime (NP).

RATINGS RATIONALE

RATIONALE FOR THE UPGRADE TO B1

FIRST DRIVER: REFORM PROGRAMME APPEARS ENTRENCHED, REFORMS IMPLEMENTED ARE STARTING TO BEAR FRUIT, LOW RISK OF REVERSAL

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.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Kathrin Muehlbronner
Senior Vice President
Sovereign
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Yves Lemay
MD - Sovereign Risk
Sovereign
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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