Société Générale: Greece better prepared to overcome the crisis – The three ‘weapons’ of the economy

Of Eleftheria Kourtali

The European debt crisis of 2010 marked many regional European countries significantly and it took more than a decade for them to recover from it. The coronavirus crisis of 2020/2021 seems to be another difficult moment, but this time things could develop completely differently, especially for Greece, as noted by Société Generale.

S&P upgraded Greece’s rating to BB with positive outlook in April. The evaluation action was guided by the economic recovery, the significant cash resources, the NGEU funds, the expected structural reforms as well as the implementation of the budget. The last upgrade of Moody’s was not long ago, raising Greece’s rating to Ba3 with stable prospects. Fitch maintained its rigorous approach due to the effects of the coronavirus and changed Greece’s rating to BB stable from BB positive in April 2020, with no further rating action thereafter.

Better prepared

Greece is undergoing a series of structural reforms on fiscal policy, financial stability, the labor market and public administration with the help of the EU. These remove restrictions on economic growth and strengthen the government’s ability to reduce its debt, according to SocGen. Greece recorded a budget surplus of 1.1% of GDP in 2020 and much of the improvement over the last decade has been structural. The banking sector, although still a credit crunch, has improved amid many reforms, with the non-performing loan ratio falling to 20% in June 2021 from 49% in 2017. Therefore, Greece is in a much better position to rapid recovery from the crisis this time.

Funding is cheaper than in other countries in the region

Greece has received a large amount of loans from the EFSF and the ESM with very low interest rates (approximately 1.1%) and long-term, and these now represent 54% of its total debt. Its trade share is only 25%, and strong support for the ECB’s monetary policy has kept Greek bond yields relatively low (since joining the PEPP).

As a result, SocGen points out, Greece’s debt sustainability is well on its way, with debt service costs lower than for other regional European countries such as Spain and Italy. Together with the help of NGEU funds, the government will have ample resources to rebuild the economy without much deterioration in its public finances.

In fact, the French bank states that among the eurozone countries only Greece, Portugal and Ireland stand out in terms of their ability to reduce their debt to pre-pandemic levels by 2025. Countries such as Spain, Finland, Belgium and France will then have a higher debt than 2019, by 15%.

The momentum of positive evaluations

Rating agencies usually take into account the history of government bankruptcies in their ratings. This of course weighs on the current rating of Greece, emphasizes the French bank. Having gone bankrupt several times in 2012 and 2015, Greece’s ratings are still lower than all other European bond issuers. However, the gap has narrowed significantly since 2015 and is now just two notches above the investment threshold (S&P and Fitch). ). Compared to other non-eurozone countries that do not have an investment grade, Greece still has a lot of room for upgrades soon.