Moody’s: ECB decision on Greece crucial, risk from end of PEPP – Greek economy performs impressively

Of Eleftheria Kourtali

Moody’s characterizes the ECB’s decision for Greece and its borrowing costs as crucial, essentially showing the reason why the house chose to keep a wait-and-see attitude and not to publish a new evaluation report for Greece on November 19, as pointed out by Capital.gr . In addition to the ECB, Moody’s notes, further progress in reforms that will boost investment and growth, a rapidly reducing debt ratio and the normalization of the banking sector are among the factors that will “signal” the upgrade from the current Ba3 with stable prospects. However, the house appears optimistic about the prospects of the Greek economy, forecasting growth of 6.1% this year and 4.3% in 2022, with the impact of carry-over effects and the strengthening of investments thanks to the resources of the Recovery Fund to strengthen the growth dynamics.

Risks of ending PEPP

Moody’s expects government interest payments on revenues to continue to decline in the coming years, reflecting the historically low funding costs and financial support still provided through the ECB’s PEPP program. The possible end of the PEPP, which will occur by the end of March 2022 at the earliest, could cause instability where the demand for Greek debt in the financial markets will be lower than optimal for the state financing needs. Thus, the ECB’s decision on Greek bonds in 2022 is crucial in this regard and may have an impact on borrowing costs. Because of this, the government is likely to accumulate bond issues over the next four months while the program is still active. Since March 2020, when the ECB began buying Greek bonds for the first time since the onset of the debt crisis, it has bought 32 billion euros (about 18% of GDP) of Greek government securities.

Moody’s then refers to the very successful exits of Greece in the markets this year, emphasizing that the government took advantage of the favorable market conditions to improve the debt yield curve this year. It recently raised 1 billion euros in the 30-year bond at an interest rate of 1.67% and 1.5 billion euros in the 5-year bond with an almost zero interest rate and the total bids amounted to 15.5 billion euros. From previous editions of this year, the government had already raised around € 11.5 billion, fully meeting the targets for the 2021 funding program. However, this target was set at the end of 2020 when the government estimated the costs associated with financial support measures for Covid will be lower.

The government will proceed with the third early repayment of the IMF loan in early 2022. The plan is to repay 1.8 billion euros of the total IMF loan in early 2022, which is expected to save 43 million euros in interest. The total savings that the government will raise thanks to all three early repayments is estimated at 228 million euros (0.1% of GDP).

Moody’s also refers to Greece’s plans to issue its first green bond in the second half of 2022. As it emphasizes, the Ministry of Finance is also developing a sustainable economic strategy and is working to integrate the climate issue into the formulation of fiscal policy in Greece. In addition, the Bank of Greece has published an eight-point plan to combat climate change, where it is committed to making financing flows consistent with a path to low emissions and climate-resistant growth.

Impressive performance

The house reports that the Greek economy grew strongly in the second quarter of 2021. Real GDP grew by 16.2% on an annual basis, as consumer spending and investment increased and the tourism sector performed strongly. Overall, the Greek tourism industry reached half of 2019 in the first eight months of 2021, putting the industry on track to exceed the government target for this year, ie to reach 40-50% of revenues in the tourism sector in 2019.

However, as Moody’s points out, the pandemic remains a source of uncertainty, given the exposure of the economy to tourism. Cases hit new daily highs almost daily in November, prompting the government to tighten restrictions on the unvaccinated section of the population.

EU resources will support the recovery

Moody’s forecasts real GDP growth of 6.1% in 2021 and 4.3% in 2022, as an increase in investment funded by the EU Recovery Fund will stimulate growth in 2022. As a share of GDP, Greece is the largest recipient of funding from the NGEU. It will receive a total of 30.5 billion euros (about 17% of our estimated GDP for 2021), almost 60% of which (17.8 billion euros) will be in the form of grants and 40% (12.7 billion) in the form of loans. Greece received 4 billion euros in pre-financing in early August and the government expects to receive the first tranche of 3.5 billion euros from the Recovery Fund in early 2022, having achieved the relevant milestones.

Factors that could lead to an upgrade

Although it decided not to change its rating or ratings for Greece last Friday, Moody’s stresses that its rating will be upgraded if further progress on structural reforms yields tangible results in the form of stronger investment and further growth and stabilization. medium-term growth prospects. A faster reduction in the government debt ratio than currently forecast would also be positive for the assessment, as would resolving the ongoing quality issues of the banking sector assets.

It is worth noting that the house estimates that the debt-to-GDP ratio of Greece will be below 200% already this year, and at 198.3% (from 206.3% in 202), while in 2022 it will be further reduced to 191 , 4%.

On the other hand, he says, Greece’s rating would come under downward pressure if progress on reforms is reversed, jeopardizing the deal with eurozone creditors. A prolonged resurgence of coronavirus infections could also put downward pressure on the assessment, if it led to a prolonged period of shrinking GDP and a further significant increase in public debt.

The explosion of inflation

The house makes extensive reference to its inflation report. The harmonized index of consumer prices rose 2.8% year-on-year in October, from 1.9% in September, the highest inflation since November 2011, but still lower than in the euro area, where Inflation rose to 4.1% in October from 3.4% in September. The main driver of rising prices in Greece was housing costs, including utility bills, which rose 12% in October.

High energy prices are likely to put further upward pressure on inflation: electricity bills have doubled for some businesses by 2021 and almost 50% of businesses expect their production price to rise by 10% due to rising energy costs.

Authorities expect inflation to exceed 4% and have stepped up support for households and companies. The government is also modifying network utility charges for gas consumers, while taking new measures to support businesses.

As the house warns, increased inflation has the potential to erode the purchasing power of households over time, if wage growth does not continue. Prime Minister Kyriakos Mitsotakis announced that the minimum wage will double in 2022: by 2% from January 1st and once again sometime in the middle of the year.

The budget deficit will remain high this year before narrowing in 2022

The budget recorded a primary deficit of 7.2 billion euros (4% of Moody’s estimate for 2021 GDP) during the period January-October 2021, in general in line with the target of 7.3 billion euros. The house expects that the general government budget deficit for 2021 will be 9.7% of GDP, just marginally reduced from 10.1% in 2020. Revenue growth has been helped by steady economic recovery, but so have spending. increased by 11.5% as fiscal policy remains expansive.

Moody’s expects the deficit to narrow significantly in 2022, to 3.9% of GDP, as the economic recovery continues and pandemic-related measures are withdrawn. Stronger growth will be the key to improving Greece’s fiscal dynamics and debt reduction, which is expected to fall below 200% this year and continue its downward trajectory in 2022. However, weaker growth and more and widespread fiscal support due to pandemic developments pose downward risks to the house’s balance sheet and general government debt forecasts, he said.

Finally, Moody’s refers to the 2022 budget submitted to Parliament a few days ago, stressing that it aims to reduce the general government deficit to 4% of GDP from 9.6% in 2021 (according to the revised estimate), assuming an increase real GDP 4.5%. Revenues are projected to increase by almost 9% from 2021, mainly due to higher tax revenues, as strong GDP growth increases taxable income.

Expenditure is projected to fall by more than 7%, with the government planning to use € 3.3 billion (just under 2% of GDP) for discretionary fiscal measures in 2022, most of which are a follow-up to measures were already introduced in 2021, for example the extension of the reduced value added tax rate of 13% instead of 24% for certain items, as well as the freezing of special solidarity contributions for employees in the private sector.

In addition, the government is introducing measures to combat youth unemployment: € 1,200 will be provided monthly for the first 6 months of full-time employment for anyone between the ages of 18 and 29 with no previous work experience. Half of this amount will be received by the employee in addition to his salary and the other half by the employer as a wage cost subsidy.