DBRS: Fiscal discipline and maintaining growth, ‘keys’ to Greek debt sustainability

Of Eleftheria Kourtali

DBRS Morningstar examines the Greek government’s forecasts for fiscal and debt in 2023-2025, according to the Stability Program and emphasizes that it views its commitment to fiscal discipline positively, however, the consequences of Russia’s invasion of Ukraine create additional uncertainty around forecasts.

The impact of adverse geopolitical developments and uncertainty about the duration of the conflict pose negative risks to the country’s prospects, he said. At the same time, it notes that debt reduction, according to DBRS, will be supported by Greece’s ability to repay and maintain primary surpluses and achieve stable nominal growth rates.

More specifically, as DBRS points out in today’s report, a longer-term impact on commodity prices and inflation could lead to lower growth, and additional measures may be needed to support businesses and households.

Prolonged or wider conflict could intensify the pre-existing effects of the pandemic, lead to weaker growth and further delay the balance of budget accounts. Despite the absence of strong economic ties with Russia, Greece’s economic growth is expected to slow this year to 3.1% according to the Stability Program, from initial estimates of 4.5%. This is mainly due to rising commodity prices and the negative impact of high inflation.

Last year, a better-than-expected growth result led to a primary deficit of 5.0%, with outperforming being in the two percentage points of GDP, as the house points out. The deficit is projected to decline further in 2023, but the implementation of energy interventions and the expected slowdown in growth will lead to a revision of fiscal targets for this year from a primary deficit of 1.4% of GDP to 2.0%. Measures to address the pandemic and the contraction of the economy in 2020 led to an increase in the public debt ratio to 206.3% of GDP from 180.7% in 2019. Strong growth and revenues led to a greater decline in the index than, what was initially expected at 193.3% in 2021.

The government forecasts that the public debt ratio will continue its downward trend, and is set at 180.2% in 2022, 13.1 percentage points lower than in 2021, due to higher inflation in 2022. By 2025 the debt ratio is estimated that it will fall below 150% of GDP, falling 59.8 percentage points from 2020 and falling below 2010 levels.

Debt

In terms of debt, DBRS notes that the public debt ratio is high, but there are factors that support its sustainability, including ECB support. He added that the change in the monetary policy stance adds pressure to the country’s borrowing costs and raises questions about how indebted countries such as Greece can maintain their public debt sustainability.

Yields on Greek bonds after recording record lows last year with 10-year yields falling to 0.5% – 5-year bond yields became negative for the first time in 2021 – have now risen significantly. The house points out that the pandemic had a severe impact on the debt debt, with the debt ratio remaining the highest in the euro area.

In his view, despite the high public debt ratio of Greece, several factors mitigate the risks arising from the increase in their returns. Debt reduction, according to DBRS, will also be supported by two other factors. Firstly, the ability of Greece to return and maintain primary surpluses and, secondly, to achieve stable rates of nominal growth.

In any case, as DBRS emphasizes, fiscal discipline and maintaining growth are the “keys” to strengthening Greece’s resilience. Successive crises – the pandemic and the war in Ukraine – underscore the importance of boosting economic growth, increasing economic diversification and maintaining fiscal stocks that could support the economy’s ability to withstand unexpected economic shocks. Prior to the COVID-19 crisis, Greece, by adhering to prudent fiscal policies, had managed to achieve high primary surpluses by providing the government with fiscal space to support the real economy.

The return to the primary budget surplus is expected in 2023 according to the Stability Program, reaching 1.1% of GDP and about 2% in 2024 and 2025. However, as DBRS points out, the fiscal outlook of Greece is not invulnerable to risks associated with the effects of the Russian invasion and ongoing developments in the energy market. This could create the need to extend support measures and lead to less favorable results next year.

Despite the significant progress that Greece has made in fiscal consolidation in recent years, GDP growth was anemic before the pandemic. DBRS believes that the funds of the Recovery Fund could have a significant impact on the long-term development trajectory of Greece. The structural reforms and investments included in “Greece 2.0” offer a unique opportunity for Greece to strengthen its fundamental size and balance its public finances.

As the rating agency concludes, the impact of adverse geopolitical developments and uncertainty about the duration of the war on economic activity, consumer and business confidence, energy prices and food prices pose some negative economic risks. prospects in the near future. However, Greece’s fundamental economic figures will ultimately determine whether the high debt burden will remain sustainable.