The 7 ‘SOS’ for achieving the investment level

By Tasos Dasopoulos

In the midst of a politico-economic storm, compounded by high inflation, reshuffles in Europe’s energy supply, interest rate hikes by the ECB and -‘s especially for Greece – the possibility of successive elections, the government is steadily aiming to recover investment.

In the last two and a half years, the creditworthiness of the Greek economy has been upgraded 9 times by the rating agencies, despite the fact that the two-year crisis was mediated by the coronavirus pandemic. In fact, since the start of the war in Ukraine, Greece has been upgraded twice by the S&P and DBRS, which have rated them one step below the investment grade, amid very high inflation and high uncertainty. The “national target”, as government officials want to call it, of the investment grade is expected in 2023.

Since 2019, Greece has borrowed about 45 billion from the markets, of which 37.6 billion euros are “safe” in the ECB portfolio through the extraordinary bond market program (PEPP) activated in March 2020 to absorb the vibrations of the pandemic. Now, after the end of the PEPP, the ECB reminds at every opportunity that it will continue to support Greece. The BoG governor, Mr. Giannis Stournaras, has recently commented that the ECB believes that Greece would have an investment grade if the coronavirus pandemic had not mediated.

Following the change in monetary policy and the decision to raise interest rates, the ECB is now designing a new tool to support the entire European South, and in particular Italy and Greece, which have seen their bond yields well above 4%.

At the same time, Greece has announced since last December an annual loan program of 12 billion euros, which it has executed with careful issues up to the amount of 4.65 billion euros, while it has available about 39 billion euros covering financial needs of the country for about 3 years.

The last steps are difficult

Since the beginning of the year, Greece has been relieved of two key “burdens”: the debt of the loans to the IMF, which was repaid in April, and the special regime of “enhanced supervision” based on the decision of the Eurogroup last Thursday. . Both moves give the character of the country’s liberation from the obligations of the 8-year period of the Memoranda and the economic crisis.

However, despite the general optimism, YPOIK executives note that the last measures before the recovery of the investment grade are always the most difficult. So far, the rating agencies have rated well the positive development of the Greek economy from the brink of disaster, where it was in 201 σε., To an economy which, despite the high debt, now operates normally next to the other economies of the Eurozone. Now the houses will rate Greece by comparing it with other economies that have the investment grade.

The 7 indicators

The rating methodology goes through 7 common indicators, based on which all rating agencies (Moody’s, S&P Fitch, DBRS, Scope) upgrade or downgrade the debt of each country regardless of the economic situation. Specifically:

1. Prudent debt management. Rating agencies want to see debt reduced. Greece has to show debt as a percentage of GDP that increased in 2020 to 206.3% due to the pandemic, which is expected to decrease in two years amid a new crisis by 20.6%, to 185.7% at the end of (as much as it was in 2019) and at 180.4% in 2023. The officials of YPOIK consider that the rating agencies have recorded the positive profile of the Greek debt. That is, it has an average maturity of 21 years, annual financing needs below 10% of GDP by 2030 and, most importantly, that the Greek Ministry of Finance has the highest liquidity reserves (39 billion euros) to cover emergencies, such as the beginning of the interest rate hikes we are going through today.

2. The constant contact with the markets. The rating agencies also monitor the confidence of the markets for each country. That is, the ability to be able to borrow at favorable interest rates from the money markets. In this area, too, Greece has a good record with the previous 2021, where lending rates were at historically low levels since the country joined the euro, despite conjunctural factors, such as the country’s exceptional participation in PEPP. The increase in yields since the end of 2021, which peaked recently, is considered to be explainable. It is not due to mismanagement of Greece, but to developments that affect the whole of Europe. This is also known to rating agencies.

3. Fiscal adjustment. Rising deficits mean mismanagement and eventually debt, which is also growing uncontrollably. Greece increased its primary deficit to 7.5% of GDP in 2020 due to the pandemic. Despite the continuation of the pandemic in 2021, the primary deficit fell to 5% of GDP. This year it is expected to decrease further to 2% of GDP, while in 2023 Greece will return to a primary surplus of 1% -1.3% of GDP, despite the extension of the general escape clause.

4. Sustainable development. One element that convinces rating agencies that things are “going well” for a country is high and sustainable growth. Greece had a great recovery in 2021, with growth that reached 8.3%. This year the official forecast is for growth of 3.1%, but the economic growth of 7% for the first quarter foretells, according to sources of YPOIK, a higher growth rate, despite the unfavorable international situation, while in 2023 the official forecast wants growth 4 , 8%. The rating agencies have pointed out the development prospects of Greece, due to the funds from the Fund for Recovery and Sustainability, the recovery of tourism but also the large increase in exports and investments. They have also highlighted the current government’s efforts to reduce taxes and increase the economy’s extroversion.

5. Health of the financial system. Evaluation firms attach great importance to the health and proper functioning of the financial system. The biggest problem in this area is the high rate of red loans and the low profitability of banks, which so far depends on deferred taxation. The financial staff has to show the reduction of the percentage of non-performing loans from 40.3% in 2019 to 12% at the end of 2021, with the prospect of reducing them in single digits by the end of 2022. However, the problem remains that , despite being removed from the banks’ portfolios through the “Hercules” program, the red loans continue to be borne by the real economy. In this direction, there should be substantial efforts for their final liquidation, through the new bankruptcy code.

6. Political stability. Another crucial issue for rating agencies is the stability and continuity of economic policy. As we approach the last year of the government’s term, relevant discussions of representatives of the rating agencies with top executives of the Ministry of Finance are becoming more and more. Representatives of the rating agencies want to know not exactly the time of the elections, but mainly about the chances of a change of policy by a new government. Elections, as a process, are only interested in the so-called electoral cycle. This is because traditionally in Greece during the pre-election period the economic policy focuses mainly on benefits through an expansionary fiscal policy. Concerns about the electoral cycle are now greater, as this time the rating agencies have realized that there is a high probability of having a double electoral contest, as it is doubtful whether the first contest, which will be held with a simple proportional, will be able to vote stable government.

7. International environment. Among the criteria of rating agencies is the international environment of each country, since it determines in part the course of the economy. For Greece, the course of the Eurozone is important, as a key trading partner of the country. So far, according to the Commission, the EU will remain on a growth trajectory, despite the slowdown due to the war in Ukraine. Regarding the close international environment, and in particular the tense relations with Turkey, based on the testimonies of officials of the Ministry of Foreign Affairs, the rating agencies do not seem to be worried. This is because Greece and Turkey are members of NATO. Given this, the possibility of war is very low, as the alliance will intervene to stop an extensive conflict, which will hit the economies of the two countries.

Because we need the investment grade

“If we had an investment grade today, our yields would be lower than those of Italy. We would be closer to Spain and Portugal”, emphasizes a competent source of YPOIK that closely monitors the course of Greek bonds.

The minimum investment tier (BBB-) will open the door wide to “conservative” investors, such as insurance funds and insurance companies that invest in savings bonds. Consequently, yields will fall automatically, the same source explains, while the markets will again price Greek bonds, which will be even more tradable. With lower yields, the stock of government borrowing will begin to decline, making debt de-escalation more comfortable.

A second gain will be in bank liquidity. Greek government bonds will be accepted as guarantees by the ECB, without the 35% -40% discount on their nominal price that they have today.

Finally, Greece, on a more symbolic level, will be able to stand next to the rest of the Eurozone countries, without special exceptions that apply today.