Moody's upgrades Greece's economy to investment grade

Moody's Ratings upgraded Greece's rating to Baa3 from Ba1 on Friday.
According to Moody’s, the upgrade reflects its view that Greece's sovereign credit profile now has greater resilience to potential future shocks. “ The public finances have improved more quickly than we had expected. Based on the government's policy stance, institutional improvements that are bearing fruit, and a stable political environment, we expect Greece to continue to run substantial primary surpluses which will steadily decrease its high debt burden. Moreover, the health of the banking sector continues to improve, which limits the risk of a banking sector-related credit event that could have a negative impact on the sovereign's credit profile,” Moody’s said.
Moody’s rating action on Greek Government is as follows:

"Moody's Ratings (Moody's) has upgraded the Government of Greece's long-term local currency (LC) and foreign currency (FC) issuer ratings to Baa3 from Ba1. We have also upgraded the LC senior unsecured ratings to Baa3 from Ba1, and the FC senior unsecured shelf and senior unsecured MTN programme ratings to (P)Baa3 from (P)Ba1. The FC other short-term rating has been upgraded to (P)P-3 from (P)NP. The outlook has been changed to stable from positive.

The upgrade reflects our view that Greece's sovereign credit profile now has greater resilience to potential future shocks. The public finances have improved more quickly than we had expected. Based on the government's policy stance, institutional improvements that are bearing fruit, and a stable political environment, we expect Greece to continue to run substantial primary surpluses which will steadily decrease its high debt burden. Moreover, the health of the banking sector continues to improve, which limits the risk of a banking sector-related credit event that could have a negative impact on the sovereign's credit profile.

The stable outlook reflects a balance between the fact that some of Greece's main credit challenges will be slow to improve and positive prospects related to the stability of the institutions and the policy stance mentioned above. On the challenges side, completing institutional and growth-enhancing economic structural reforms will take time. Though debt-to-GDP has fallen quickly in recent years, it will remain one of the highest in our rated universe. Having said this, the Greek authorities are using the positive momentum created by the Recovery and Resilience Fund (RRF) resources to robustly implement credit-supportive policies.

We have also raised the local currency and foreign currency country ceilings to Aa3 from A1. For euro area countries a six-notch gap between the local currency ceiling and the local currency issuer rating, as well as a zero-notch gap between the local currency ceiling and foreign currency ceiling is typical, reflecting benefits from the euro area's strong common institutional, legal and regulatory framework, as well as liquidity support and other crisis management mechanisms. It also reflects our view of de minimis exit risk from the euro area.

Over a number of years, the Greek public finances have outperformed our baseline expectations, which increases our confidence that Greek debt will remain on a firm downward path. These improvements are due to both ongoing expenditure restraint and tax revenues that are rising quickly in light of ongoing institutional improvements in tax compliance and collection. In 2024, Greece generated an extra EUR2 billion in tax revenue through its anti-evasion efforts, including a narrowing in the VAT gap. It has done this in part through a large-scale digitalisation strategy that also supports tax compliance. The push to modernize tax administration continues, which supports our expectation that tax revenue growth will remain robust over the medium term.

This revenue outperformance is not coming at the expense of a rising tax wedge (the difference between before-tax and after-tax wages), which is important to preserve economic competitiveness. In fact, the labour tax wedge has fallen by around 4.5 percentage points since 2019, and the authorities continue to prioritise modest tax reductions, such as a cut in social security contributions, that allow the population to feel the fruits of anti-evasion efforts.

Looking forward, Greece is expected to continue to run large primary surpluses, and we anticipate that they will remain at 2 to 2.5% of GDP over the medium term. This will come about through a combination of expenditure restraint and stable revenue generation. The current state of heightened geopolitical risk in Europe has less of an impact on Greece than it does on other south European countries. Greece has reached or exceeded the NATO 2% of GDP defence spending target for many years and the country does not have a backlog of underinvestment in defence in the same way that we see in other EU (European Union, Aaa stable) countries.

In all, Greece's debt-to-GDP ratio has declined by about 50 percentage points since its peak in 2020, and it is down by around 27 percentage points relative to pre-Covid levels. We estimate that it stood at 156.1% of GDP at the end of 2024 and project that it will decline to 148.3% and 140.6% in 2025 and 2026 respectively. The country's debt structure remains favourable, with an average term to maturity of 18.8 years, with all of the debt at fixed rates. At the end of 2024, Greece prepaid EUR7.9 billion  of its crisis-era debt (in the Greek Loan Facility, GLF). The Prime Minister announced in late 2024 that the country plans to make a EUR5 billion early repayment of GLF debt once again in 2025. With the 2024 prepayment, Greece will have repaid around 61% of the outstanding loans under the GLF and in the coming years is aiming to prepay the debt that comes due in 2033-41."
 

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