[ad_1]
A positive surprise was the upgrade of Greece’s credit rating by Moody’s last night, especially since it came at a time when the second wave of lockdowns nullifies all forecasts, both for the Greek and European economies in general, and forces house analysts to get back to pencil and paper and review all their forecasts and scenarios. Therefore, the market reasonably expected that Kathryn Milbronner, who monitors the Greek economy on behalf of Moody’s, would maintain a wait-and-see attitude in this review, which was the last scheduled for 2020.
Ultimately, it turned out that Moody’s confidence in the reforms and growth prospects for the Greek economy outweighed any concerns about the financial implications of the second lockdown. Moody’s upgraded Greece’s credit rating to Ba3 from B1 previously and is now approaching the crisis of the other two large companies, as S&P rates Greece at BB- (that is, at the same level, according to its own methodology) and Fitch in BB (that is, one more step).
Milbronner’s analysis directly links the update to ongoing reforms, which supposedly “support a sustainable improvement in the strength of institutions and have already made tangible progress in areas such as fiscal management, tax compliance, and the fight against corruption.”
In particular, among the reforms highlighted by Moody’s is the Independent Revenue Authority, which has increased tax revenues and improved tax compliance, the ongoing digitization of the public administration and the social security system, and the important steps taken by government towards a more systemic approach to the management of banking sector red loans, through the Hercules program. Milbronner also makes special reference to the reform of the judiciary.
“While it will take a multi-year commitment to see the full benefits of the institutional changes that are taking place to create a modern and efficient public administration, these improvements have started to show up in governance indicators,” Moody’s said.
“In Moody’s opinion, the risk of a reversal of these important improvements is low,” the firm said in a statement, and analysts explained that the current government was elected on the basis of an economic and business-friendly reform agenda. . and it will probably use its parliamentary majority to promote this platform.
The outlook for the economy is positive
The second factor that led Moody’s to improve its solvency is the positive outlook for the Greek economy, even in the context of the significant recession caused by the impact of the coronavirus. Moody’s estimates that the country’s improved investment prospects will support the recovery and substantially improve Greece’s medium-term prospects. It is also important to support both growth and investment through the disbursement of funds from the European Recovery Fund, as Greece is the largest beneficiary (relative to GDP) of all euro zone countries.
According to Moody’s, Greece will receive 32 billion euros from the European Recovery Fund, 60% of which will be grants, as well as significant funds from the EU Structural Funds, the European Bank for Reconstruction and Development and the European Bank for Reconstruction and Development. Investment. At the same time, the fact that Greek bonds have been included in the large quantitative easing program of the European Central Bank helps to ensure favorable financing conditions not only for the Greek state, but also for Greek banks and the economy as a whole. set.
Thus, while Moody’s expects a recession of almost 9% for 2020, a strong recovery is expected in 2021. But what is considered even more important for the assessment of Greece are the country’s medium-term growth prospects, which the house estimated approximately. at 3.5% per annum.
In essence, Moody’s describes a sea change in Greece’s investment profile, recalling that in the past, public investment plans remained on paper and private investment was weak. Reforms such as the new investment licensing framework are already yielding visible results, as the World Bank’s Doing Business survey finds the business creation process in Greece more efficient than anywhere else in the EU, Moody’s notes. .
Thus, foreign investment reached its highest levels last year at least since 2002, and Moody’s made special reference to Microsoft’s recent decision to select Greece for its three data centers.
Following this, Moody’s estimates that public debt will rise significantly this year, to around 200% of GDP, before re-entering a downward trajectory in 2021, with the help of the GDP recovery. However, the Chamber explains that the debt ratio is not as important for Greece as it is for other countries, given the very long-term maturity of Greek debt and the significant and repeated debt relief provided by official sector creditors. If the Greek state can pay debt service (debt affordability), which is measured by paying interest relative to government revenue, it is much better for Greece (at 6.2% by 2021) than for Greece. Ba country average and is expected to continue growing, Moody’s notes.
Of course, the housing analysis could only be sustained in the country’s still weak banking sector, with NPL exposures remaining very high, 36.7% in June, and expected to rise further due to the crisis. However, Moody’s is also making progress in this area, citing the reduction of NPE by 15.7 billion euros in the 12 months (until June 2020) and the implementation of the Hercules plan, which is characterized as an important step towards consolidation. of bank balance sheets.
After that, Moody’s offers strong prospects for the new assessment of Greece, recognizing that it will take time to see the benefits of the reforms and additional measures to improve asset quality in the banking sector.
What does it mean for Greek bonds
The upgrade of Greece’s credit rating by Moody’s may be a significant vote of confidence with great symbolic value, especially now that the economy enters the test of a second lockdown, however it is not expected to have a significant impact on Greek bonds.
The large financial cost of the pandemic has essentially derailed Athens’ path out of the garbage, with the result that the ratings are 2-3 steps away from the investment category. And while this fact means that Greek bonds are excluded from the portfolios of the world’s largest investment funds, their inclusion in the emergency stock market program implemented by the European Central Bank during the pandemic (PEPP), and even in derogation of the rules. wanting the ECB to buy only investment grade bonds has been enough to drive borrowing costs back to their lowest level.
Therefore, with the ECB effectively announcing the extension of the PEPP program in December, the “oracles” of the rating agencies are probably secondary to the market.
Chr. Staikouras: “Extremely positive development for Greece and its economy”
“Finance Minister Christos Staikouras described Moody’s improvement of Greece as” evidence of increased confidence in the country and the government, “he said. The full statement states the following:
“The credit rating agency Moody’s improved the credit quality of our country.
This is an extremely positive development for Greece and its economy.
In fact, the assessment was conducted under conditions of unprecedented recession in the world economy and individual national economies, as well as the high uncertainty that the pandemic has brought.
This development is evidence of increased confidence in the country and the Government, for the management of the current crisis, its reform initiatives and the prospects for the Greek economy.
For our part, we continue the effort with faith in the forces of the country, plan, calm and determination, to make our country stronger, its economy more productive and our society more just and cohesive ”.
