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1. Greece has achieved material fiscal and institutional improvements under its current adjustment programme, which MoodyÎ„s believes will be sustained in the coming years. Those improvements in turn should help support the recovery of the economy as well as the banking sector;
2. MoodyÎ„s believes that Greece will successfully conclude its third support programme and return to self-sufficiency and market-based funding. Its "clean" exit will be supported in the near term by a substantial cash buffer and over the medium to long term by the strong commitment of GreeceÎ„s euro area creditors to providing further debt relief;
3. The risk of another default or restructuring on the debt owed to private investors has therefore materially declined, and the uncertainty around that judgment has also diminished materially. While Greece was at a similar juncture in mid-2014, MoodyÎ„s believes that the risk of reversal and derailment of the fiscal and economic progress achieved is now materially lower.
The outlook on the ratings remains positive. MoodyÎ„s could further upgrade the rating if the reforms implemented over the course of the programme yielded results that are more positive than expected, leading to sustained economic growth and a more rapid decline in the public debt ratio in the context of a stable political environment.
The long-term country ceilings for foreign-currency and local-currency bonds have been raised to Ba2 from B3, to reflect the reduced risk of Greece exiting the euro area. The long-term ceilings for foreign-currency and local-currency deposits have been raised to B3 from Caa2. The deposit ceilings remain aligned with the government bond rating to reflect the ongoing capital controls. The short-term foreign-currency bond and bank deposit ceilings remain unchanged at Not Prime (NP).
RATIONALE FOR UPGRADE OF THE RATING TO B3
First driver: Material fiscal and institutional improvements under the current adjustment programme, which will likely be sustained in the coming years GreeceÎ„s performance under its current third adjustment programme has exceeded expectations and has been far stronger than under its two earlier programmes. In particular, the Greek government has managed to put its public finances on a more sustainable footing, with primary surpluses in excess of 2% of GDP and close to balance in overall terms in 2016 and 2017. A significant part of the improvement is due to structural measures which will provide lasting fiscal benefits, including reforms to the income and value added tax systems, pension and health care spending reforms, restructuring of public enterprises as well as measures to contain the public wage bill. Overall, the European Commission estimates that the cumulative benefit of structural fiscal measures will amount to around 4.5% of GDP by the end of 2018.
In addition, the Greek government has legislated a contingent fiscal package of automatic tax increases and spending cuts that would be activated if needed to achieve the primary surplus target (of 3.5% of GDP) for the years 2019-2022. Those measures support the view that the budget targets are likely to be met even if economic growth turns out to be more moderate than currently expected. Such a budgetary performance should reduce the public debt ratio by around seven percentage points of GDP within the next two years, to just above 174% of GDP in 2019, from a peak of above 181% in 2017.
Significant progress has also been achieved with regards to the other objectives of the programme: GreeceÎ„s profound institutional weaknesses in public and tax administration as well as the judicial system, all of which contributed to the crisis, are being addressed, as evidenced e.g. by the establishment of independent tax revenue and privatisation entities and the replacement of political appointees at the top levels of the public administration. These institutional and governance changes should over time result in visible improvements to GreeceÎ„s currently low institutional strength scores.
The banking sectorÎ„s key weaknesses -- including very high levels of non-performing exposures (NPEs) - are being tackled in a more forceful manner than over the past eight years. The legal and technical requirements for conducting electronic auctions -- a key measure for banks to realize collateral and accelerate the clean-up of their balance sheets -- are now in place and the banks themselves have committed to individual NPE reduction targets. MoodyÎ„s also notes positively that the systemÎ„s reliance on emergency liquidity from the Bank of Greece and the Eurosystem has been on a declining trend over the past year and customer deposits have been returning to the system. The banks were also able to issue covered bonds in recent months, diversifying their funding away from central bank financing. Of the €25 billion set aside in the programme for bank recapitalisation, only €5.4 billion was needed.
Economic prospects have also become more positive. The economy has started to grow, although at a still very moderate pace. MoodyÎ„s notes that the pace of the recovery is similar to that in the other euro area periphery countries at a similar point of their exit from external support. Exports of goods and more recently also revenues from tourism have been rising strongly, reflecting the global and euro area recovery under way. Consumer spending has been more moderate but should benefit from the improving labour market situation as well as from the successful conclusion of the program and the ongoing stabilization of the banking sector. Investment is already benefitting from a concerted effort by the EU and official lenders such as the European Investment Bank (EIB). While MoodyÎ„s is not revising its real GDP growth forecasts of 2% and 2.2% for 2018 and 2019 respectively, the agency is more confident than before that these forecasts will be realised, given that a successful conclusion of the programme should lift consumer and business confidence, and support private capital inflows.
Second driver: Successful conclusion of adjustment programme now highly likely. GreeceÎ„s return to market funding will be supported by large cash buffer and creditor commitment to debt relief so as to keep borrowing needs at manageable levels
MoodyÎ„s now considers it highly likely that Greece will successfully complete its third support programme in August. That view is supported by the positive conclusions that the Eurogroup reached at its meeting on 19 February, even though it delayed the formal conclusion of the third review until after the completion of two final prior actions (out of 110 in total). GreeceÎ„s "clean" exit from the programme -- without further support being required or conditions attached -- and its return to self-sufficiency and market-based funding will be supported in the near term by a substantial cash buffer, using some of the remaining funds available under the programÎ„s €86 billion envelope. MoodyÎ„s expects a cash buffer of at least €18 billion (around 10% of 2018 GDP) to be built up initially, so as to support investor confidence and ease GreeceÎ„s return into the capital markets. This compares to debt maturities of €17.3 billion between September 2018 and December 2020. Such a buffer would be larger than those targeted by other program countries at their point of exit.
The governmentÎ„s funding needs will be very manageable in the coming years. MoodyÎ„s estimates that gross borrowing needs will decline from around 14% of GDP this year to below 12% in 2019 and further to below 8% by 2020, in line with the latest European Commission estimates. This reflects the back-loaded repayments to the EFSF (European Financial Stability Facility) and European Stability Mechanism (ESM) (GreeceÎ„s largest creditors) as well as successful liability management exercises last year that have reduced an earlier repayment "hump" in 2019. Also, the Greek governmentÎ„s budgetary performance has been very strong since 2016; MoodyÎ„s expects a broadly balanced overall budget this year and a small overall surplus next year. In MoodyÎ„s view, the large cash buffer provides similar assurance as would a precautionary or other official-sector credit line.
Over the medium to long term, the strong commitment of GreeceÎ„s euro area creditors to provide further debt relief will ensure manageable borrowing needs and the support the sustainability of GreeceÎ„s debt load. A first set of debt relief measures has already been implemented by the ESM over the course of 2017, resulting in an estimated reduction in GreeceÎ„s debt load by 25 percentage points of GDP by 2060. MoodyÎ„s expects euro area creditors to spell out the details of medium-term debt relief in the coming months as they committed to do upon successful conclusion of GreeceÎ„s support programme. They are likely to include a mechanism to link debt relief to GDP growth outcomes, indicating a more flexible stance of the euro area than in the past.
Third driver: Risk of another default or restructuring on private sector debt materially lower than previously
In MoodyÎ„s view, the risk of another default or restructuring on the debt owed to private sector, which is the risk captured in the rating, has materially declined, and the uncertainty around that judgment has also diminished materially. While Greece was at a similar juncture in mid-2014, MoodyÎ„s believes that the risk of reversal and derailment of the fiscal and economic progress achieved is now materially lower.
The political situation and outlook are more stable. While elections will have to be held by September 2019 at the latest, the painful and politically challenging structural fiscal, economic and institutional reforms have been legislated. The current Greek government has established a stronger and more consistent track record than any of its predecessors. GreeceÎ„s euro area creditors have become significantly more supportive of Greece as a result. MoodyÎ„s notes that reviews have been concluded faster and in a significantly more constructive atmosphere than expected at the onset and also compared to the prior two programs.
The risk of reversal will also be limited by the likely linkage between debt relief and Greece remaining on track with its commitments to its official sector creditors. Such a link would provide a clear incentive for the Greek authorities not to reverse the key structural reforms that have been implemented over the past several years, even given inevitable domestic political pressures in the run up to the 2019 elections. MoodyÎ„s still believes further debt relief will be required, given the very elevated public debt levels that even under the ECÎ„s most optimistic scenario would still stand at 126% of GDP by 2030. While GreeceÎ„s official euro area creditors will not consider a reduction in the principal of outstanding debt, a series of other measures including a further extension of maturities will likely be implemented to limit GreeceÎ„s gross financing needs to manageable levels (below 15% of GDP in the medium term and below 20% thereafter).
RATIONALE FOR POSITIVE OUTLOOK
The positive outlook reflects the potential for even more positive outcomes should the good track record of implementing reforms be maintained beyond the end of the adjustment programme, resulting in stronger-than-expected and sustained economic growth and a more rapid reduction in the public debt ratio than currently foreseen. That said, the two-notch upgrade already incorporates a forward-looking view of a continued economic recovery, ongoing prudent fiscal policy and a gradual decline in the very elevated public debt burden over the coming two to three years. It also incorporates MoodyÎ„s expectation that further debt relief will be granted by the euro area.
WHAT COULD CHANGE THE RATING UP/DOWN
The rating could be upgraded further if the reform efforts were sustained beyond the end of the programme and yield, or look likely to yield, more positive results than currently expected in the form of stronger economic growth and a more rapid decline in the public debt ratio. Faster-than-expected improvements in the banking sectorÎ„s health could also be a trigger for a positive rating action.
The rating could come under downward pressure if -- against expectations -- the Greek government decided to deviate from its commitments and reversed reforms that had been previously agreed and legislated, or if tensions with official creditors re-emerged for any other reason. This would put the euro areaÎ„s continued support and commitment for further debt relief in jeopardy.
The positive conclusions that the Eurogroup announced following its meeting on 19 February signal a high likelihood that Greece will successfully complete the third review under its adjustment programme. This event prompted the publication of this credit rating action on a date that deviates from the previously scheduled release date in the sovereign release calendar, published on www.moodys.com.
On 20 February 2018, a rating committee was called to discuss the rating of the Greece, Government of. The main points raised during the discussion were: The issuerÎ„s governance and/or management, have materially increased. The issuer has become less susceptible to event risks. Other views raised included: The issuerÎ„s economic fundamentals, including its economic strength, have materially increased. The issuerÎ„s fiscal or financial strength, including its debt profile, has materially increased.