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
