It is the second of the four major rating agencies, which are taken into account by the European Central Bank that made this move
Credit rating agency S&P has given Greek bonds an investment grade, upgrading them to BBB- from BB+ with a stable outlook.
It is the second of the four major rating agencies that it considers the European Central Bank which proceeded with this move, as the Canadian bank DBRS had preceded it on September 8.
In its announcement, S&P speaks of an improvement in Greece's public finances thanks to fiscal adjustment efforts, while noting that since the debt crisis of 2009-2015 significant progress has been made in addressing Greece's economic and fiscal imbalances.
“We expect that additional structural economic and fiscal reforms, combined with large resources from the EU, will support strong economic growth in the period 2023-2026 and consolidate the ongoing reduction of public debt,” notes the house.
The stable outlook, according to S&P, reflects the balance between risks from the external environment that could affect the open Greek economy, with the house's expectations that targets for permanent primary surpluses will continue to guide the reduction of public debt.
The significant fiscal adjustment, notes S&P, put Greece's fiscal course on a strongly improved trajectory. Bolstered by the very rapid economic recovery, the Greek government was able to outperform against fiscal targets despite a gradual increase in social transfers. “We expect the government to achieve a primary surplus of at least 1.2% of GDP this year, exceeding its target of 0.7% despite significant fiscal costs linked to recent floods and fires. We forecast an average primary fiscal surplus of 2.3% of GDP over the period 2024-2026. In our view, political pressures are likely to complicate the government's ability to maintain large fiscal surpluses over the medium to long term, and this could slow progress on debt reduction in the later years of our forecast horizon and beyond,” notes house.
For the parliamentary elections, S&P says they have empowered the ND government and that the clear mandate and avoidance of a potentially unstable coalition allows the government to continue to build on previous reform efforts .
“The election result appears broadly to be a mandate for policy continuity and we expect the government to push forward with its reform agenda, which includes further addressing the still large public debt (eg by further closing VAT gap), securing the stability of the banking system and structural reforms in the justice and healthcare systems, among other efforts to strengthen Greece's competitiveness”.
Estimates for the Greek economy
S&P estimates that net government debt will fall to around 146% of GDP by the end of the year, which would be a significant improvement from the high of 189% of GDP in 2020. This to some extent also reflects the “ dividend from inflation', but also due to rapid post-pandemic growth and strong fiscal adjustment. “While debt remains high, its profile is among the most favorable of all the countries we assess” as its weighted average maturity was 19.7 years at the end of June 2023 and its interest servicing costs correspond to its relatively modest rate 5.7% of the estimated revenue of the general government, he notes.
Like all small open economies, “Greece remains exposed to changing winds in the global economy, including the risks of a possible economic slowdown that would affect the important outbound sectors of tourism or shipping, or of a new sudden spike in energy prices . These developments could slow down the improved dynamics of Greece's credit indices. Our ratings are still limited by high public debt and a weak external position”.
The American house estimates that Greek GDP will grow by 2.5% this year, significantly more than the other Eurozone countries, supported mainly by investments and tourism.
The recovery from the debt crisis and then the pandemic forged the initial recovery in investment and confidence in the economy. The rapid digitization of public services has brought significant progress in reducing tax evasion and unlocking other positive outcomes in the public sector. “The strong performance of tourism, shipping and manufacturing in recent years, together with the progress of banks in selling and liquidating their non-performing exposures has prompted additional investment”.
The house does not consider that climate phenomena , such as the fires and floods that hit Greece this year, will significantly affect the development of the Greek economy, due to their limited spatial and temporal nature.
For the period 2024-2026, it predicts an average growth rate of 2.6%. Regarding the banks, he notes that “given their very strong performance” in 2023, along with the broader clear improvements in their asset quality, “we view the plans” to sell the HFSF's stake in them by 2025 “as broadly credible.” ».
The significance of the upgrade from S&P
Greece has already secured, with the upgrade from DBRS, the inclusion of its bonds in the ECB's bond purchase programs (QE), without needing exceptional approval. The upgrade from S&P paves the way for Greek bonds to enter the radar of large institutional investors, such as pension funds and mutual funds.
These institutional investors buy investment-grade securities from two of the three major American rating agencies – S&P, Fitch and Moody's.
Therefore, with a possible upgrade also from Fitch on December 1st, which today rates Greece one step below investment grade, Greek government bonds will acquire a much wider than the current base of long-term investors.
As for Moody's, after the double upgrade of Greece on September 15, it is likely that he will also give the investment grade rank on his next assessment.
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