Dun & Bradstreet (DBRS Morningstar) upgraded the Hellenic Republic’s Long-Term Foreign and Local Currency – Issuer Ratings from BB (high) to BBB (low). DBRS also upgraded Greece's Short-Term Foreign and Local Currency – Issuer Ratings from R-3 to R-2 (middle) with an assessment of Stable on all ratings.
DBRS is the first international credit rating agency to upgrade Greece’s national debt to investment grade. Some of the reasons behind DBRS’s decision include the national reforms introduced by the Mitsotakis Government (now in its second term) together with additional recovery resources from the EU regular budget as well as the NextGen EU pandemic response plan.
DBRS states that:
After experiencing a strong rebound in 2021, the Greek economy continued on a solid footing in 2002 with real GDP expanding by 5.9%, outpacing the EU and the euro area averages. In 2021, the economy grew by 8.4%, supported by strong investment and export growth as well as pent-up private consumption. The economy remained strong in 2022 posting 5.9% real GDP growth driven by ongoing improvements in the labour market, and government support measures.
This year, growth is projected to moderate, although to exceed 2.0% as solid tourism revenues and accelerating investment activity will support the economy. In its Stability Programme 2023, the government forecasts GDP growth of 2.3% this year, driven mainly by investment. Supported also by the Recovery and Resilience Funds (RRF), investment spending has been rising since 2019, increasing the share of investment in GDP from 10.7% to 13.7% at the end of 2022. In DBRS Morningstar’s view the implementation of past reforms has enhanced the resilience of the Greek economy.
Greece continues to make good progress with the implementation of the Greece 2.0 plan by utilizing both the grant and the loan component of the NGEU. This is helping also to increase the capital stock, which in 2022 turned positive, the first time since 2009. Thus far, Greece has received EUR 5.75 billion of grants and EUR 5.35 billion for the loan component. At the end of August, the government requested to modify its plan and to add additional fund under the REPowerEU chapter.
The total envelope is expected to reach almost EUR 36 billion for reforms and investments, which is projected to help close the investment gap between Greece and its EU peers and improve growth prospects. This constitutes a contributing factor to the credit improvements In DBRS Morningstar’s view. The deployment of EU funds, if combined with the implementation of structural reforms, will improve Greece’s growth prospects and warrants a positive qualitative adjustment to the “Economic Structure and Performance” building block assessment. Furthermore, the outcome of the June 2023 election result will bring another four years of political stability, allowing the government to proceed apace with reforms and investments.
While Navigator Consulting agrees that the current policy mix of investment-led growth and [anaemic] digital transformation is a correct policy mix (and certainly better than the record of previous administrations), Greece remains trapped in a series of policy decisions which detract from its ability to compete in the European and global economies.
While Greece’ nominal GDP has indeed rebounded to € 208 billion in 2022, central government debt reached € 405 billion in June 2023. This debt is now higher than it was during the onset of the Greek financial crisis in 2010. The only reason Greece is able to sustain this is due to long maturities, artificially-low interest rates, and refunding the profits by most Eurozon central banks. The fact is that Greece has made almost no progress in paying down the principal of its national debt.
Much of the economic rebound is attributed to a vastly oversaturated and overexpensive tourist sector; a property boom due to the Greek Golden Visa Programme; and EU funding. None of these is sustainable in the longer term without a radical improvement in infrastructure, strategic planning and management, and a sustained and integrated investment in productivity.
As the recent heatwaves, forest fires and flooding have also shown, the main sectors of the Greek economy are under considerable threat from climate change.
Greece should now be considered a relatively high tax and high cost economy with a very low level of public service quality. Public services in education, justice and healthcare remain among the lowest in the European Union by nearly any measure. The quality of public management remains low in every respect.
While we welcome the decision by Dun & Bradstreet to upgrade Greece’s sovereign debt to investment grade, we do remind investors in Greece that a comprehensive risk assessment, due diligence and strategic planning is needed to succeed. Positive news headlines aside, very little about the functioning of the Greek economy has actually changed from a systemic viewpoint.
For further consultancy support in investing in Greece, please contact us.
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