London, 06 November 2020 -- Moody's Investors Service, ("Moody's") has
today upgraded Greece, Government of local and foreign currency
long-term issuer ratings to Ba3 from B1 previously. Moody's
has also upgraded the local currency senior unsecured debt rating to Ba3
from B1, as well as the foreign currency senior unsecured MTN programme
and senior unsecured shelf ratings to (P)Ba3 from (P)B1. 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 remains stable.
The key drivers for today's rating action are the following:
1. Ongoing reforms support a sustainable improvement in institutional
strength and have already brought tangible progress in areas including
tax administration and compliance and the fight against corruption.
In Moody's view the risk of reversal of these important improvements
is low. Moody's considers this action to be motivated in
part by governance-related factors under its ESG framework.
2. The country's growth prospects over the coming years are
positive notwithstanding the negative near term impact of the pandemic
particularly on the tourism sector. Greece's economy will
benefit from ongoing efforts to improve the investment climate coupled
with inflows of very substantial European recovery funds. Favourable
growth prospects, combined with a return to a prudent fiscal stance,
will lead to a gradual reversal in the public debt trend. In addition,
Greece benefits from a very favourable debt structure and strong affordability.
The stable outlook reflects Moody's view that it will take some
time before the benefits of the institutional and governance reforms become
fully embedded and visible. Also, the banking sector --
despite further improvements over the past year -- still requires
strong action to improve its weak asset quality.
The long-term foreign and local currency bond and deposit ceilings
have been raised to A3 from Baa1 previously. The short-term
foreign-currency bond and bank deposit country ceilings remain
at Prime-2.
RATINGS RATIONALE
RATIONALE FOR THE UPGRADE TO Ba3
FIRST DRIVER: REFORMS ARE BRINGING A SUSTAINABLE IMPROVEMENT IN
INSTITUTIONAL STRENGTH
Since the last rating action in March 2019, momentum on the implementation
of structural reforms has been strong. Progress continues to be
made with regards to outstanding reform commitments agreed between the
previous administration and the Eurogroup in June 2018. These build
on the achievements made under Greece's third adjustment programme
between 2015 and 2018, which placed significant emphasis on institutional
and governance reforms.
Improvements to Greece's institutions and governance are visible
in areas such as the independent revenue administration which is resulting
in higher tax revenues and improved compliance. Ongoing digitization
of the public administration and social security system has positive implications
for tax compliance as well as the effectiveness of the public administration
and contributes to an improving business environment. The government
has made important steps towards a more systemic approach to deal with
the banking sector's high level of non-performing exposures
(NPEs) through the Hercules Asset Protection Scheme (APS) as well as a
new insolvency framework expected to enter into law at the start of next
year. Reforms to the judicial system are ongoing, alongside
further measures to bring the quality and professionalism of the public
administration in line with European peers. Taken together,
these reforms help to address drivers of Greece's economic and debt
crisis of the last decade.
While it will take commitment over many years to reap the full benefits
of the institutional changes in progress to create a modern and efficient
public administration, these improvements are beginning to be reflected
in governance indicators. Greece has improved on all Worldwide
Governance Indicators that Moody's considers since 2016, the
first full year of the third adjustment programme. The results
of the independent tax revenue administration's (IAPR) key performance
indicators show a clear upward trend in tax debt collection and enforcement
since 2017. Wider use of electronic payments, alongside increased
incentives and continuing improvements in IAPR's capacity,
should further underpin the recent improvements in tax collection.
In Moody's view the risk of reversal of these reforms in the coming
years is low. The current government was elected on a platform
of economic and business-friendly reforms and seems likely to use
its parliamentary majority to push forward that platform. Over
the medium-term, today's action reflects Moody's
view that governments will continue to aim for compliance with the challenging
targets agreed with the Eurogroup and that incentives on both sides are
strong enough to avoid the stand-offs seen earlier in the decade.
SECOND DRIVER: EUROPEAN FUNDS AND IMPROVING INVESTMENT CLIMATE WILL
BOLSTER GREECE'S INVESTMENT OUTLOOK AND MEDIUM-TERM GROWTH
PROSPECTS
Notwithstanding the significant economic contraction resulting from the
coronavirus-induced shock, Moody's expects stronger
investment prospects to support the recovery and materially improve Greece's
medium-term growth outlook. The disbursement of EU recovery
funds, for which Greece will be the largest euro area beneficiary
relative to GDP, will provide significant support to both headline
growth and investment. While Moody's expects Greece's
economy to contract by almost 9% in 2020, a strong recovery
is expected in 2021. More importantly for Greece's credit
profile, growth is expected to average around 3.5%
over the medium term.
Greece stands to receive €32 billion (17% of 2019 GDP) from
the EU recovery funds, of which 60% will be in grants.
The funds offer significant potential to redress Greece's low investment
- hitherto the lowest in the EU and a key constraint to the pre-coronavirus
recovery trend -- and to raise potential growth. Greece is
also receiving significant multilateral funds from other sources including
the EU's Structural Funds, the European Bank for Reconstruction
and Development (Aaa stable), and the European Investment Bank (Aaa
stable), which will also support investment growth. Greece's
inclusion in the ECB's large quantitative easing programme helps
to ensure favourable funding conditions not only for the government but
also for the Greek banks and for the economy as a whole.
In the past, Greece has at times failed to deliver on public investment
plans, and private investment has been weak. Key reforms
that have been implemented in the recent past are a new investment licensing
framework which among other things significantly eases the administrative
burden on new investments and removes key impediments, in addition
to the rollout of digital tools. The first results are visible;
according to the World Bank's Doing Business surveys, starting
a business is now more efficient in Greece than anywhere else in the EU.
Inward foreign direct investment last year reached the highest level since
at least 2002, partly driven by several successful privatizations
and more recently in the real estate sector. Microsoft Corporation's
(Aaa, Stable) recent decision to locate three data centres in Greece
is one indication of the country's improving attractiveness for
foreign investment. The government is also close to updating the
public procurement law, which will be important if the country is
to make full use of the available EU recovery funds.
Moody's projects Greece's debt ratio to increase significantly this
year, to around 200% of GDP, before declining again
from next year onward on the back of the expected economic recovery.
However, the debt ratio itself is of more limited relevance than
for other countries, given the very long maturity structure of the
debt and the significant and repeated debt relief provided by Greece's
euro area creditors. Debt affordability, as measured by interest
payments in relation to government revenue, is much stronger (forecast
at 6.2% for 2021) than the median of Ba-rated peers
(10.9%) and is expected to continue to improve, supported
by very favourable financing conditions.
The banking sector remains very weak, characterized by weak asset
quality and a large share of lower quality capital in the form of deferred
tax credits. Non-performing exposures remain very high,
at a ratio of 36.7% as of June 2020, and are likely
to grow given the economic impact of the crisis. However,
even here improvements are evident. NPEs declined by €15.7
billion in the twelve months to June 2020. The Hercules APS scheme
in operation since December 2019 is an important step in cleansing banks'
balance sheets of non-performing assets. The government
acknowledges that more is needed and has indicated that it will likely
push ahead with a complementary proposal from the Bank of Greece which
would cover a larger amount of NPLs and would also aim to tackle the large
amounts of deferred tax assets on the banks' balance sheets.
RATIONALE FOR STABLE OUTLOOK
The stable outlook balances Moody's view that while a reversal of
the improvements seen in recent years is unlikely, it will take
some years before the benefits of the institutional and governance reforms
become fully embedded and visible. The rating agency also notes
that the pandemic has caused the delay in the completion of some reforms.
A resurgence of the pandemic in Europe, notwithstanding Greece's
more favorable performance during the "first wave",
could create a further backlog in the measures intended to be implemented
during 2021.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Moody's takes account of the impact of environmental (E), social
(S), and governance (G) factors when assessing sovereign issuers'
economic, institutional, and fiscal strength and their susceptibility
to event risk. In the case of Greece, the materiality of
ESG to the credit profile is as follows.
Environmental considerations are not currently material to the rating,
although Greece has some exposure to physical climate risk related to
heat and water stress.
Social factors are material in determining Greece's credit profile.
The most relevant social factors relate to the impact of an ageing population
and significant emigration on labour supply and potential growth.
The fiscal impact is less of a concern given material pension reforms
over the past several years. Moody's also regards the coronavirus
outbreak as a social risk under its ESG framework, which is negatively
affecting Greece's growth and fiscal metrics. An important
mitigating factor are the very substantial funds that Greece stands to
receive from the EU.
Governance factors are material in determining Greece's credit profile.
While Greece's institutions remain weaker than most European peers,
there have been significant improvements, reflecting the implementation
of important governance reforms in the public administration. These
governance reforms have been a key driver for the rating upgrade.
GDP per capita (PPP basis, US$): 31,572 (2019
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1.9% (2019 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.1%
(2019 Actual)
Gen. Gov. Financial Balance/GDP: 1.5%
(2019 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -1.5% (2019 Actual)
(also known as External Balance)
External debt/GDP: [not available]
Economic resiliency: ba1
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 03 November 2020, a rating committee was called to discuss the
rating of 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 materially increased.
The issuer's fiscal or financial strength, including its debt profile,
has not materially changed. The issuer's susceptibility to event
risks has not materially changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Greece's rating would come under upward pressure over the medium
term if further progress on structural reforms yields tangible results
in the form of stronger investment and further lifts and solidifies medium-term
growth prospects. A more rapid reduction in the public debt ratio
than currently foreseen would also be positive for the rating, as
would the resolution of the banking sector's continuing asset quality
issues.
The rating would come under downward pressure if progress in reforming
Greece's institutions were to be reversed, putting at risk
the agreement with the euro area creditors. A prolonged resurgence
of coronavirus infections could also put downward pressure on the rating
if it led to an extended period of GDP contraction and a further material
rise in public debt.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, 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 further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
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 Risk Group
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/ Sub Sovereign
Sovereign Risk Group
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
