Scope Ratings GmbH (Scope) has upgraded the Hellenic Republic (Greece)’s long-term issuer and senior unsecured debt-category ratings to BBB from BBB- in local- and foreign-currency and revised the Outlooks to Stable, from Positive. The short-term issuer ratings have been affirmed at S-2 in local- and foreign-currency, with the Outlooks remaining Stable.
Rating rationale
The upgrade to BBB reflects Scope’s expectation of a continued reduction in Greece’s general government debt ratio during the forthcoming years. This decline is seen being driven by favourable debt dynamics, alongside stronger-than-anticipated primary fiscal surpluses and an associated further narrowing of the headline budget deficit. The resilience of the banking system is reinforced by progress in reduction of non-performing loans (NPLs), privatisations of systemic banks and the gradual amortisation of deferred tax credits (DTCs) on bank balance sheets. In addition, the adoption of structural reforms and investments, reduction of macroeconomic imbalances and more-durable support from European institutions bolster macroeconomic sustainability and trend growth.
Key rating drivers
The continued decline of government debt and strong fiscal performance. The first driver of the one-notch upgrade of Greece’s long-term ratings to BBB reflects the sustained reduction in Greece’s public debt. This is primarily driven by favourable public-debt dynamics as supported by a strengthened medium-run nominal-growth outlook, still-low average interest costs of the outstanding debt, and a government commitment to budgetary prudence.
The general government debt ratio has declined significantly from its pandemic-crisis peaks of 212.6% of GDP as of 2020, reaching an estimated 155.3% by the end of 2024, representing a meaningful 57pp reduction and falling already under the pre-pandemic levels of 185.5% from end-2019. The robust economic recovery since Q2-2020 alongside elevated inflation recently and reduced fiscal deficits have driven a marked decline of public debt and the drivers appear sustainable enough as to maintain continued debt declines even if at a gradually moderating pace.
The debt ratio is forecast to ease to 145.0% of GDP by the end of 2025, before easing further to 132.0% by end-2029. If realised, the latter might represent Greece’s lowest debt ratio since the beginning of the Greek crisis in Q1 2010. The agency’s debt projections for Greece have strengthened due to continued budgetary out-performance, as the government is anticipated to exceed a 2024 primary-surplus estimate from Budget 2025 of 2.4% of GDP. Scope has updated medium-run primary-balance assumptions and expects the government to average 2.75% of GDP primary budget surpluses during 2024-27 over the remainder of the Kyriakos Mitsotakis government, an increase from an earlier assumption as of July 2024 of 2.4-2.5% surpluses during the same years.
The continued focus on budgetary prudence provides Scope with an increased confidence in the ability of government to achieve and sustain elevated primary-surplus objectives ahead of the next general elections barring unforeseen crises. This is despite the reduced conditionality and increased policy making sovereignty after Greece exited from the economic adjustment programmes and post-bailout enhanced surveillance. Primary surpluses align with more-moderate headline fiscal deficits averaging a forecast 0.7% of GDP over 2024-29.
Scope’s debt projections assume output growth of 2.2% for this year, 2.2% next and 1.6% on average from 2026 to 2029. The medium-run projection is nevertheless comparatively optimistic, currently reflecting no recession to 2029. In addition, Scope assumes GDP-deflator inflation of 2.5% during 2024-29, a significant assumption compared against a deflationary -0.4% average of 2012-21.
Downside risks for the agency’s baseline economic scenario include: i) a sharp economic downturn; ii) an unexpected return to lower inflation; iii) a sharp rise in borrowing rates; and/or iv) a material weakening of the budgetary position. As an example, under a stressed economic scenario of two consecutive years of recession during 2025-26, Greek debt might reach 169% of GDP by 2026.
Improvements in banking-system resilience. The second driver of the ratings upgrade is the ongoing enhancement of banking-system stability and reduced sovereign-bank links.
Greek banks have made considerable progress concerning their NPL reductions. System-wide NPLs on a consolidated basis declined significantly from 49.2% as of June 2017 - reaching 6.4% by June 20241. This reduction has been supported by NPL securitisations as guaranteed under the Hercules Asset Protection Scheme (HAPS) - which has been re-introduced last December to cut NPLs at the less-significant Greek banks and runs until the end of this month. Scope expects the NPL ratio to continue declining as banks remain committed to furthering balance sheet clean-up. Nevertheless, NPLs remain at this stage above the EU averages of 1.9% as of Q2 2024, and moreover remain in the system even if not reported by the official statistics.
Profitability has improved since the end of 2021 on the back of increased interest incomes benefitting from currently higher lending rates, the declining loan loss provisioning and increased non-recurrent incomes from financial operations and hedging instruments. System-wide tier 1 capital is strengthening from retained earnings and asset de-risking. As of Q2 2024, it amounted to 16.2% of risk-weighted assets, as compared against 13.0% at 2021 lows.
Despite the significant reductions of NPLs, pressures on banking-system balance sheets continue from the elevated shares of DTCs within aggregate banking-system capital (accounting for 41% of total prudential own funds as of June 2024), nevertheless declining from the 52% as of end-2022. Amortisations of DTCs are foreseen by the Bank of Greece being potentially accelerated to fully amortise by 2032-34 barring extenuating circumstances. The ECB approved the payment of banking-system dividends for the first time in 15 years, representing a milestone.
The Hellenic Financial Stability Fund (HFSF) recently completed the sale of 10pps of a 18.4% holding in the National Bank of Greece (NBG) by a marketed share offering. HFSF expects to transfer a final 8.4% share in NBG and 72.5% of the smaller Attica Bank to the sovereign wealth fund before closing down by the end of this year (ahead of a deadline by the end of 2025)2. The HFSF sold its final 8.9781% stake in Alpha Services and Holdings to UniCredit in November of last year and sold the final 27% stake in Piraeus Bank this spring.
In addition, other aspects of the sovereign-bank inter-linkages such as banks’ domestic government bond holdings are being partially addressed. HAPS is not seen being further extended from end-2024, so guarantees will gradually draw down moving ahead. The referenced actions curtail the legacy of the Greek crisis and cut stepwise sovereign-bank interlinkages - supporting a one-notch rating upgrade at this intermediate stage.
Enhanced macroeconomic stability and higher medium-run trend growth. The final driver of the rating change is enhanced macroeconomic stability following the crises of the past 15 years, alongside sustained structural reforms and investment, which have supported the economic outlook.
Progress has been sustained on the reforms and investments of “ Greece 2.0”, the Greek Recovery and Resilience Plan (RRP) and the EU Cohesion Policy. On 16 October of this year3, the European Commission disbursed the fourth payment of EUR 998.6m in grant monies from Greece’s EUR 35.9bn Recovery and Resilience Plan - composed of EUR 18.2bn on the aggregate in grants and EUR 17.7bn in loans. A total of 51% of RRP funding has been paid out to date. Investment in the Greek economy remains low - 14% of output as of the year to Q2 2024 - but this is nevertheless stronger than the below 11% as of 2019.
The rating agency has modestly increased its estimate of Greece’s economic growth potential to 1.25% a year from 1.0%, still recognising the modern economic history of Greece - with growth having averaged just -0.4% during the past two decades - alongside demographic bottlenecks such as -0.9% a year working-age population changes forecast by the United Nations during 2024-29. Stronger nominal economic growth is anticipated over the forthcoming years - partially given harmonised inflation of an elevated 3.0% for this year, 3.4% in 2025 and 2.5% for 2026, after 4.2% last year.
The still-elevated unemployment has edged lower (to 9.8% as of October this year - from June 2020 peaks of 20.4%) although this remains well above the EU averages of 5.9% as of October 2024. Scope assumes Greek unemployment easing to 10.1% on average this year before 9.5% for 2025 and 9.0% in 2026, from 11.1% last year, on the back of continued above-trend economic growth.