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Fitch Affirms Greece at ‘BBB-‘; Outlook Stable

Fitch Ratings has affirmed Greece’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BBB-‘ with a Stable Outlook.

A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS
Credit Strength and Weaknesses: Greece’s ratings reflect income per capita levels and governance indicators that are well above the ‘BBB’ median, as well as policy credibility supported by EU and eurozone membership. These strengths are set against the legacies of the sovereign debt crisis, which include large stocks of public and external debt, as well as high albeit falling unemployment, low medium-term growth potential and some persistent vulnerabilities in the banking sector.

Steady Primary Surpluses: We forecast a continued reduction in the headline general government deficit to 0.8% of GDP in 2025, with primary surpluses averaging 2.3% in 2024-2025 (from 1.9% in 2023). Recent performance has been bolstered by stronger-than-expected revenue intake and expenditure restraint.

Fitch sees a strong commitment to fiscal prudence, with the government’s medium-term fiscal plans anchored by conservative revenue assumptions at a time when the authorities are forging ahead with ambitious revenue-raising reforms (including reducing tax evasion among the self-employed and promoting electronic transactions). Successfully raising revenues could create some fiscal space, although the new European fiscal framework places some limits on additional expenditure.

Falling Public Debt: Fitch expects the combination of strong fiscal outturns, stable interest costs and moderate nominal growth to continue to drive the public debt/GDP ratio down, to 147.3% in 2025 (from 161.9% in 2023) and under 140% in 2028. This would be a substantial adjustment (the ratio peaked at 207% in 2020) but would still leave debt well above the ‘BBB’ (55%) and eurozone (89.9%) medians. The country’s favourable debt profile—long maturities, no FX debt, and a high share of concessional debt—significantly reduces market risks, while large cash reserves (EUR35 billion in 1Q) serve as a buffer and could be used to reduce debt levels further.

Stock-Flow Adjustments: There is some uncertainty around future stock-flow adjustments given legacy issues and the use of on-lending, although in our view, they will not adversely affect Greece’s growing record of improved public finance management. Contingent liabilities are around EUR29 billion (12% of GDP, including EUR17 billion from the Hercules asset protection scheme), while a potential ruling next year by Eurostat to reclassify deferred interest on EFSF loans could add EUR12 billion (5.6%) to the debt stock. This will not affect the gross financing requirement or our expectations of continued public debt deleveraging. Privatisation also provides some upside.

Growth Momentum to Continue: Fitch expects real GDP growth to rise to 2.3% in 2024 and 2.4% in 2025 (from 2% in 2023), well above the eurozone average (1.1%), helping the country achieve some income convergence. Economic growth will be driven by real-wage increases, continued employment growth and solid investment. We expect investment related to the Recovery and Resilience Facility (RRF) to accelerate, with grant absorption peaking at 3% of GDP in 2026 from 1% in 2023, with positive spill-overs to private investment and consumption.

RRF Effect: The loan component of the RRF (which totals EUR17.7 billion, 7.4% of GDP) will take longer to absorb as it is channelled via on-lending facilities. This means that the RRF investment cycle is likely to be extended beyond 2026, reducing risks of sudden growth slowdown in 2027. Greece’s medium-term growth outlook remains weighed down by low savings/investment in the economy and adverse demographics, although strong commitment to reforms (particularly on the supply side) could help bring higher and more resilient growth.

Tightening Labour Market: Greece’s recovery has been accompanied by steady improvement in the labour market, with unemployment currently at a 15-year low (10.2% in March), rising employment growth and modest increases in participation. We see further gradual reduction in unemployment over the next two years, but risks of labour shortages are rising, particularly among labour-intensive sectors such as tourism and construction.

The authorities are focusing on a series of reforms to increase the labour force but pressure on wages are likely to increase. At present, wage dynamics are relatively muted (4%), but there is a risk they have a more persistent effect on inflation and possibly affect competitiveness over the medium term.

Lower CAD: Lower commodity prices and strong growth in services exports contributed to a rapid narrowing of the current account deficit (CAD) in 2023, although at 6.3% of GDP it remains among the highest in the eurozone. We expect a more gradual decline in the CAD in 2024-2025, partly due to the projected recovery in external demand for goods and continued strong performance of tourism (earnings were a record EUR18 billion in 2023).

Solid inflows of foreign direct investment and capital flows will also boost the external position. At 120.6% of GDP in 2023, net external debt is well above the ‘BBB’ median (3%) although it is at a decade low and will continue to gradually fall over the medium term.

Banking Sector: Greek banks have maintained a high liquidity position and strong profitability, supported by higher interest rates, restructuring completion and balance sheet clean-up. The total capital ratio rose to 18.8% at end-2023, only slightly below the eurozone average of 19.7%. The consolidated non-performing loans ratio fell further to 6.2% at end-2023 (from 8.7% at end-2022) and we expect this ratio to decline further in 2024-2025 due to a combination of organic actions and small portfolio sales.

ESG- Governance: Greece has an ESG Relevance Score (RS) of ‘5’ and of ‘5[+]’, respectively, for Political Stability and Rights and for Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Greece has a medium WBGI ranking at 62.7 reflecting a recent track record of peaceful political transitions, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a moderate level of corruption.

RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
-Public Finances: Renewed upward trend in general government debt/GDP, for example, due to structural fiscal loosening, prolonged weak growth or materialisation of significant contingent liabilities.

-Macro: A severe adverse shock that would affect Greece’s medium-term growth potential and worsen external competitiveness.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
-Public Finances: Persistent and significant decline in general government debt/GDP, driven for example by fiscal consolidation over the medium term.

-Macro: Improvement in medium-term growth potential and performance, for example, driven by higher investment and/or implementation of structural reforms.

SOVEREIGN RATING MODEL (SRM) AND QUALITATIVE OVERLAY (QO)
Fitch’s proprietary SRM assigns Greece a score equivalent to a rating of ‘BB+’ on the Long-Term Foreign-Currency (LT FC) IDR scale.

In accordance with its rating criteria, Fitch’s sovereign rating committee decided not to adopt the score indicated by the SRM as the starting point for its analysis because: the SRM output has migrated to ‘BB+’, but in our view this is potentially a temporary deterioration. Consequently, the committee decided to adopt ‘BBB-‘ as the starting point for its analysis

Fitch’s sovereign rating committee did not adjust the output from the adopted SRM score to arrive at the final LT FC IDR.

Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

COUNTRY CEILING
The Country Ceiling for Greece is ‘AA-‘, 6 notches above the LT FC IDR. This reflects very strong constraints and incentives, relative to the IDR, against capital or exchange controls being imposed that would prevent or significantly impede the private sector from converting local currency into foreign currency and transferring the proceeds to non-resident creditors to service debt payments.

Fitch’s Country Ceiling Model produced a starting point uplift of +1 notches above the IDR. Fitch’s rating committee applied a further +5 notches qualitative adjustment to this, under the Long-Term Institutional Characteristics pillar reflecting the sovereign’s membership of the eurozone currency union and the associated reserve currency status. The agency views the risk of imposition of capital or exchange controls within the eurozone as exceptionally low but not negligible.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS
Greece has an ESG Relevance Score of ‘5’ for Political Stability and Rights as World Bank Governance Indicators have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As Greece has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.

Greece has an ESG Relevance Score of ‘5[+]’ for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight. As Greece has a percentile rank above 50 for the respective Governance Indicators, this has a positive impact on the credit profile.

Greece has an ESG Relevance Score of ‘4[+]’for Human Rights and Political Freedoms as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver. As Greece has a percentile rank above 50 for the respective Governance Indicator, this has a positive impact on the credit profile.

Greece has an ESG Relevance Score of ‘4’ for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Greece, as for all sovereigns. As Greece has a fairly recent restructuring of public debt in 2012, this has a negative impact on the credit profile.

The highest level of ESG credit relevance is a score of ‘3’, unless otherwise disclosed in this section. A score of ‘3’ means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch’s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision.
Source: Fitch Ratings

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