London, 29 November 2013
Moody’s Investors Service has today upgraded Greece’s government bond rating to Caa3 from C. The outlook on the rating is now stable. The short term ratings remain Not Prime (NP).
The upgrade reflects the combination of the following key drivers:
- The significant fiscal consolidation that has taken place under Greece’s structural adjustment program despite low growth and political uncertainty. As a result, Moody’s expects that the government will achieve (and possibly outperform) its target of a primary balance in 2013, and record a surplus in 2014 in accordance with the adjustment program.
- The improvement in Greece’s medium-term economic outlook supported by a cyclical recovery in the economy and also the progress made in implementing structural reforms and rebalancing the economy.
- The significant reduction of the government’s interest burden following previous restructurings and official sector repayment assistance.
The key drivers taken together reduce the likelihood of further Private Sector Involvement (PSI) being undertaken as a condition for further financing.
Concurrently, Moody’s has today raised the local and foreign-currency ceiling of Greece to B3 from Caa2.
RATIONALE FOR UPGRADE
The first driver behind Moody’s upgrade of Greece’s rating is the government’s progress in fiscal consolidation under the Troika-supported program, which has led to a 74% (or 11.6% of GDP) decline in its headline deficit since 2009. Based on the government’s budget execution record up until October, Moody’s believes that the government’s deficit target (4.1% under the Troika support program, 13.5% of GDP according to Eurostat’s definition, which also includes bank recapitalization costs) is likely to be within reach. Moreover, the government’s recently presented 2014 budget envisages a further reduction in the general government deficit, which remains in line with targets under the Troika support program.
Moody’s recognizes that the 2014 budget balances the fragile social and political environment in the country with the country’s commitment to its international creditors. As a result, the rating agency expects the focus of the budget will remain on savings generated from structural reform measures as opposed to further expenditure cuts. That being said, Moody’s believes that the government remains committed to achieving a primary surplus of close to 1.5% of GDP in 2014, especially as this will be required to qualify for continuing debt reduction from official creditors.
The second driver behind the upgrade is the evidence that the Greek economy is bottoming out after nearly six years of recession and that the combination of cyclical factors and the implementation of structural reforms are leading to a gradual improvement in medium-term growth prospects. Over the near term, the rating agency expects only a modest contraction of 0.5% in 2014 before the Greek economy records growth of 1% in 2015. Net exports will remain the near-term growth driver of the economy (led by tourism receipts) supported by a deceleration in consumption and investment growth. Although private investments remain fragile and weak, public investments continue to be supported with the disbursements and greater absorption of EU structural funds.
Looking further ahead, the rebalancing of the economy continues, with Moody’s expecting the current account to shrink to a deficit of 0.5% of GDP in 2013 from an average deficit of around 10% over the previous five years. In addition, sentiment indicators — namely industrial confidence surveys as well as indicators for the service industry — illustrate a significant upward improvement in business expectations for the next 12 months.
The third driver of today’s rating action is Greece’s significantly reduced interest burden, resulting from the compositional change in the country’s debt profile following two defaults on private-sector debt and as a result of the official-sector repayment assistance. Moody’s expects that, as at year-end 2013, approximately 83% of Greece’s general government debt will be owed to the official sector (mainly the IMF, EU and the ECB and euro area governments), with the balance accounted for by domestic banks and other private sector creditors.
Key debt metrics have improved as a result of this new creditor structure. Greece’s debt-affordability ratio (general government interest expenses as a percentage of revenues) has decreased to an estimated 9.2% in 2013 from 17.0% in 2011, and interest as a percentage of GDP at around 4% of GDP is now consistent with other countries in the euro area. Greece’s debt-maturity profile has also been lengthened to around 17 years in 2013, from around 6.5 years in 2011. Moody’s does caution, however, that Greece’s substantial debt stock (estimated at 175% of GDP in 2013) continues to weigh on its solvency. Although the rating agency expects debt to peak next year and then to fall from 2015 onwards, the overall reduction will be gradual and will remain susceptible to nominal growth shocks and policy implementation risks.
The very significantly diminished share of privately held debt may also weaken the rationale for a new round of PSI in order to improve Greece’s debt profile. This assessment balances the limited financial benefits to Greece’s supporters with their incentive for the country to regain access to the private debt markets as quickly as possible.
However, Moody’s notes that the above-mentioned credit positive drivers are balanced by Greece’s still large debt burden and the expectation that the current political environment will prove challenging in terms of negotiations with official creditors (as reflected in the latest negotiations on the 2014 budget). As a result, the rating remains at a low level to reflect the associated risks to the few remaining private-sector creditors.
RATIONALE FOR RAISING LOCAL AND FOREIGN-CURRENCY CEILING
Moody’s has raised the local and foreign-currency ceiling of Greece to B3 from Caa2. Notwithstanding a fragile and unpredictable domestic political environment, the B3 country risk ceiling reflects a slightly lower redenomination risk and a lower likelihood of exit from the euro area as a result of a slowly improving economy, improved debt affordability and continued euro area support as the country achieves its targets under the Troika program.
WHAT COULD MOVE THE RATING UP/DOWN
Moody’s could consider upgrading the rating in the event of a combination of (1) an easing of political uncertainty; (2) a continuation of structural reforms which would support long-term economic growth; and (3) sustained primary surpluses, which would support a continued decline in debt levels.
Conversely, the rating could be downgraded if there is a deceleration in the implementation of the Troika economic program due to heightened political risk and reform fatigue, as this would further hinder Greece’s growth prospects and its ability to generate large primary surpluses over the coming years.
GDP per capita (PPP basis, US$): 24,260 (2012 Actual) (also known as Per Capita Income)
Real GDP growth (% change): -6.4% (2012 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 0.8% (2012 Actual)
Gen. Gov. Financial Balance/GDP: -9% (2012 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -2.4% (2012 Actual) (also known as External Balance)
External debt/GDP: [not available]
Level of economic development: Low level of economic resilience
Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.
On 25 November 2013, 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 fiscal or financial strength, including its debt profile, has materially increased. The issuer has become less susceptible to event risks, particularly contingent liabilities emanating from the banking sector. However, the political environment in Greece continues to be fragile.