Scope Ratings: Launches 9.3% estimate for Greece’s growth in 2021 – Why not worry about Greek bonds

Of Eleftheria Kourtali

Scope Ratings has proceeded to a new upward revision of its estimates for the development of Greece in 2021, in the context of the established monitoring review report (monitoring review) which the house conducts every six to 12 months and which is not an evaluation report.

The house now estimates that Greek GDP will grow by 9.3% in 2021 from 8.9% it had previously estimated – and which is the highest estimate we have seen from a house. For 2022 the growth is estimated to be at 4.4% and in 2023 at 2.5%, while the estimates for the public debt and the deficit are revised downwards. The debt-to-GDP ratio is estimated to fall to 198.7% at the end of 2021 (from 199.1% previously forecast) and to 192.2% at the end of 2022 and slightly below 180% by 2026.

The deficit is set at 9.5% in 2021 and 4.8% in 2022, with primary surpluses returning in 2023-2026.

As Scope Ratings notes, Greece’s long-term BB + / fixed outlook ratings (and just one notch below investment grade) are backed by multiple credit advantages:

Firstly, the significant European institutional support since the Covid-19 crisis, in the form of monetary and fiscal policy support measures. These include innovations in the ECB asset purchasing programs and the temporary easing of collateral requirements, such as waivers. The ECB bond markets under PEPP will be discontinued by the end of March 2022, however, market interventions under this program have been extended through the possibility of resuming PEPP at any time while enhancing the flexibility of the repurchase program.

Scope notes that the Governing Council of the ECB made a “policy shift” during its February meeting, increasing the likelihood of faster normalization of monetary adjustment. However, ECB measures, together with EU fiscal support, following the approval of the Recovery Plan, consolidate the country’s access to markets, support debt sustainability and create fiscal space for the Greek government to spend on public investment.

According to the house, the yield on the Greek 10-year bond may have exceeded 2% due to the conclusions of the ECB meeting, but it remains at a moderate level in relation to history. It is worth noting that today the 10-year yield reaches 2.3%, marking an increase close to 10% from Friday levels.

Second, the enhanced public debt profile of Greece is a credit positive catalyst, which results from the debt support measures of the creditors of the euro area, the still moderate global interest rate conditions as well as the prudent management of the public debt.

Thirdly, the policy of structural reforms The Greek government has reduced the high NPLs and strengthened the stability of the banking system, while the government is focusing on reforms to mobilize private sector investment, mitigating the bottlenecks associated with investment, boosting economic recovery.

However, Greece’s credit ratings are also facing challenges, as Scope points out, the following: 1) the very high public debt stock, which represents a continuing potential vulnerability as markets reassess the risk associated with rising inflation, the gradual normalization of ECB policies and the debt sustainability of vulnerable government borrowers, 2) the weaknesses of the banking sector associated with the still high stocks of NPEs in the balance sheets of domestic banks, despite the significant reductions that have taken place, and the continuing risk surrounding the large interconnection between the state and banks, and 3) structural weaknesses such as low medium-term growth potential, high unemployment, limited economic diversification, labor market rigidities and a weak external sector.

Finally, as the house states, Greece’s rating can be upgraded if 1) Eurosystem support for Greek debt is further strengthened as the crisis subsides, 2) fiscal consolidation and economic recovery show the continuation of a strong and continuous downward trajectory of debt, 3) structural economic and external imbalances are reduced, increasing medium-term growth potential and enhancing macroeconomic sustainability; and 4) banking sector risks are further reduced by strengthening lending to the private sector.

On the contrary, the rating could be downgraded if 1) Eurosystem support for Greek debt was limited, 2) fiscal policies remain loose for a longer period of time or there is a new economic downturn, hindering the reduction of public debt, 3) the commitment to reform weakens, such as after the completion of the enhanced supervision program or after the elections, reducing the prospects for reducing macroeconomic imbalances and undermining potential European support, and 4) the risks of the banking sector intensify again.