SocGen, Citi: How well-founded are the hopes for an upgrade of Greece today by Fitch

Her Eleftherias Kourtalis

Following the recent moves by S&P and DBRS which brought Greece just one rung ahead of investment grade, keeping within reach the government’s goal of regaining this milestone by 2023, the market hopes that similar positive news will be “heard” ” and from Fitch today. However, both Société Générale and Citigroup estimate that Fitch will be reluctant to take this step today, and the reason is the very high inflation as well as the increase in the country’s borrowing costs.

In general, the analysts estimate that what is required of Greece in order to see the upgrades it desires and become “investable” and with the bull, it should enter a demonstrably sustainable development path.

So, as he points out Société Générale, inflation and recession fears remain the key concern for Greece. High inflation continues to accelerate in the euro area, particularly in Greece, Belgium and Spain, he notes. This puts countries in the periphery back into focus, as an inflation-driven recession could strain governments’ ability to repay their debt, and the fiscal health of countries in the South is seen as the most fragile.

However, the positive momentum in Greece continues, SocGen points out, and the country’s economic and fiscal data in 2021 turned out to be better than the IMF had earlier expected. Meanwhile, this week, Greek Prime Minister K. Mitsotakis said the government will increase pensions from 2023 for the first time since the debt crisis.

In addition, S&P upgraded Greece to BB+ with a stable outlook in April, with Fitch expected to give its own verdict at its scheduled assessment this evening, as it rates the country at BB with a positive outlook.

As the French bank emphasizes, Fitch has warned that the energy shock could slow down Greece’s fiscal consolidation process. As it estimates, the house will likely keep its rating unchanged for now as it tries to find the balance between the positive news about Greece’s structural improvements and the potential risks of high inflation.

Citi: An obstacle is the increase in borrowing costs

Similar is the opinion of Citigroup, which also does not expect any change in Greece’s rating today from Fitch. The main obstacle for a positive movement from the house, in her opinion, is the increase in Greece’s borrowing costs compared to January when he had proceeded to upgrade the country’s prospects to positive ones. Specifically, as he mentions, Greece’s borrowing costs have more than doubled since then.

In addition, as Citi points out, Fitch’s rating model also considers the BB rating for Greece to be fair, and for this reason, in its base scenario, the American bank places Greece’s rating unchanged.”

However, Citi acknowledges that S&P upgraded Greece to BB+ with a stable outlook in April, when Greek bond yields were very close to where they are today. A new upgrade, he points out, would thus bring Greece just one rung away from investment grade by three of the big four houses (apart from S&P and DBRS), and thus give it eligibility for the ECB’s PSPP program.

It is worth noting that the next scheduled ratings of Greece after today’s by Fitch are the double verdict by Moody’s and DBRS on September 16, the third rating by Fitch on October 7 and the last rating for the year by S&P, on October 21.

However, all the houses have set as key factors for the upgrading of Greece the downward trajectory of the debt and the sustainable development course, something that the Bank of Greece also emphasized in the Report on Monetary Policy. As noted by the Bank of Greece, the main challenge that the economic policy has to face, in an unfavorable international environment, is the maintenance of growth dynamics as, in addition to strengthening the medium-term prospects, it will also contribute to the upgrading of Greece to investment grade, thus increasing the resilience of the economy to future exogenous shocks.

Analysts raise their growth estimates

However, the estimates of the analysts are encouraging. HSBC this week upgraded its forecast for growth in Greece this year to 6.5% from 4% previously, explaining that it is tourism that will essentially provide additional impetus to the Greek economy, mainly in the second and third quarters , adding 2-3% to GDP, while at 3.5% he placed growth in 2023.

And ING made a significant upgrade to its growth estimate for Greece this year, forecasting that Greek GDP will grow at a rate of 4.2% this year, up from the 2.9% it previously forecast.. As he points out, the favorable profile of the Greek debt – combined with the continued support of the ECB, means that there is no concern about its sustainability, however in the long term the maintenance of economic growth will be vital. “In the long run, as higher interest rates apply to an increasing share of debt, slowing real GDP growth will again push debt up, and primary surpluses will be required to ensure a downward debt/GDP trajectory,” he notes. “Needless to say, improving long-term economic growth would be crucial for debt sustainability in the coming years. This is why the Recovery Fund was created, with a more generous allocation of funds for Southern European countries.” , as he adds.

So, according to ING, it is no surprise that current medium-term fiscal planning in heavily indebted countries such as Italy and Greece already foresee a return to primary surpluses in the next three years. The level of primary surplus required will depend on how effectively countries can shift to a faster growth path on a sustainable basis. How countries use the funds from the Recovery Fund will thus play a key role,” the Dutch bank concludes.

“The battle for debt sustainability will be more convincingly won if the mix of reforms and investment on which the Recovery Fund disbursements depend is properly implemented,” ING concludes.