Fitch upgraded Greek debt to investment grade – “Favorable dynamics of Greek debt”

Fitch gave us the investment grade. It upgraded the credit rating of the Greek economy to BBB-minus, keeping its outlook stable. In the announcement it is pointed out forecast for strong growth, the strengthening of fiscal disciplinethe progress in the banking sector and the record debt reduction. “For a great national success”, said Kostis Hatzidakis. “A large part of the upgrade is due to the reduction of non-performing loans,” stressed the Deputy Minister of Finance, Thanos Petralias.

It is the fourth house taken into account by the European Central Bank, which ranks Greek bonds in the investment grade, as they were preceded by Scope Ratings in August, DBRS in September and S&P in October.

Fitch is also the second of the big three US rating agencies, after S&P, to give it an investment grade and this will allow more institutional investors to buy Greek bonds, thus increasing capital inflows and further helping to contain borrowing costs of the Greek government and businesses.

Oi key drivers for the upgradeaccording to a statement from Fitch, is the favorable dynamics of Greek debt, the commitment to fiscal adjustment, resilient growth, policy continuity and the improvement of the banking system.

In particular, the house states that assesses the fiscal outlook with great weight for the upgrading of Greece.

For the debt it states that expects its ratio to GDP to remain on a significant downward trajectorythanks to strong nominal growth, budget overperformance and a favorable service structure. It also rates policy risks as relatively low, “with the political framework stable and fiscal prudence well entrenched.”

«We forecast debt to fall to 160.8% of GDP this year and to 141.2% in 2027 from 171.4% in 2022. Its projected decline of 65 percentage points from a pandemic high of 205% is among the best performing countries rated by Fitch, although the debt ratio is still projected to be three times the median of BBB-rated countries . Mitigating factors such as low servicing costs, very long repayment periods and a significant cash cushion (about 16.5% of GDP in mid-November) limit risks to public finances,” he notes.

Fitch reports that Greece has a high commitment to fiscal adjustmentwith the primary surplus expected to widen to 1.1% of GDP this year and average 2.2% in 2024-2025, according to its forecasts. The deficit in the fiscal balance (ss: including interest) will be 1.1% of GDP on average in the two years 2024-25, lower than the median deficit of countries with outstanding BBB (2.8%). Fiscal prudence, the house adds, is entrenched in conservative spending assumptions in recent budgets (and also in the 2024 budget), with revenue outperformance providing fiscal space for temporary spending, which in 2023 included measures to energy crisis and climate change.

«The authorities are planning tax reforms in 2024 that will generate additional revenues of 600 million euros for social spending. Coupled with efforts to improve digitization and reduce tax evasion, this could strengthen the tax revenue base and provide further fiscal space for additional growth-enhancing investment.”

As medium-weight factors that led to the upgrade, Fitch cites resilient growth, policy continuity and an improving banking system.

The house now forecasts that the Greek economy will grow at a rate of 2.4% in 2023, a slight upward revision from the previous forecast. The new forecast reflects better-than-expected consumption performance in recent quarters and the house’s expectations that strong investment performance will continue. “We expect growth to remain flat (an average of 2.4%) in 2024-2025, helped by lower inflation, continued absorption of EU funds and improved economic confidence. Downside risks relate mainly to external developments, although Greece has appeared more broadly resilient to weakening demand from key trading partners, thanks in part to the strong performance of services sectors.”

Policy risks have faded after New Democracy’s clear victory in June’s election, which gives it a clear majority to implement its reform agenda in the coming years, Fitch notes.

“Reforms in areas such as the business environment, the rule of law and the labor market are on the way and could boost medium-term potential growth and address some structural weaknesses. Commitment to the Recovery and Resilience Fund remains strong, with Greece making incremental progress in terms of disbursement and planning, although some implementation risks remain.”

The Greek banking system’s rating improved to ‘bb’ from ‘b’ following Fitch’s September 2023 viability ratings upgrades of the four major banks. These upgrades mainly reflected structural improvements in bank profitability, leading to capital accumulation and continued improvements in asset quality.

Capitalization of the banking sector stood at 17.3% in June, while on an overall basis the ratio of non-performing loans fell slightly to 8.6% in the second quarter of 2023 compared to 8.7% at the end of 2022 and a high of 46% in 2017.

“We expect further improvement in asset quality in the short to medium term but at a more subdued pace, with asset sales playing a smaller role. Credit expansion continued to weaken in 2023, including housing and consumer loans, but we expect it to gain momentum in 2024, in part as factors adjust to a higher interest rate environment,” notes Fitch.

The Minister of National Economy and Finance, Kostis Hatzidakis, made the following statement:

“The upgrade of the Greek economy by Fitch formalizes Greece’s promotion to the investment category from the point of view of credit rating. It is a great national success!

Fitch is the third – out of the four – rating agency recognized by the ECB to award investment grade status to our country in recent months. A fact that certifies the progress of the Greek economy and the even more positive perspectives that are opening up with the implementation of our policy. At the same time, it creates the conditions for further strengthening of investment inflow, better financing conditions for the economy, growth and increase in employment.

I underline the house’s remarks about the record reduction of debt by 65 percentage points of GDP, from 205% during the pandemic to 160.8% this year and 141.2% of GDP in 2027. Also, the remarks about fiscal responsibility policy which, among other things, ensures the necessary resources for permanent and extraordinary social policy measures. Forecasts for strong growth and political stability in the coming years. Progress in the banking sector.

Today’s upgrade is an important step that takes our country even higher, with the continuation of the combination of fiscal seriousness with social sensitivity».

The Deputy Minister of National Economy and Finance, Nikos Papathanasis, made the following statement:

“The new upgrade of the country’s credit rating, this time by Fitch, is the result of the systematic work done by the Mitsotakis Government and further strengthens the international vote of confidence in the reform policy being pursued.

The investment grade achieved by Greece, after 13 years, strengthens the credibility of the country. Public debt is deescalating and making Greek securities more visible to institutional long-term investors internationally. It causes a further reduction in borrowing costs. It magnifies the prospects of further income increases for all, primarily for young women and men.

We continue to implement everything we have committed to.”

Th. Petralias: A large part of the upgrade is due to the reduction of bad loans

A large part of the result of the upgrading of the creditworthiness of the Greek economy by the four credit rating agencies and now by Fitch is the reduction of bad loans made through the “Heracles” program, emphasized Deputy Minister of National Economy and Finance, responsible for fiscal policy, Thanos Petralias. “Of course, it was also due to the improvement of the Economy, but the big reduction was made through the Hercules program”, said Mr. Petralias, closing the debate on the bill on bad loans in the Plenary of the Parliament this evening and noted that “this is the last step” .

Mr. Petralias emphatically emphasized that “we became a normal European country” and informed the House that: So far we have given 18.7 billion in guarantees and there is a balance of 16.7 billion. In other words, the 2 billion have been repaid and the State has also collected 223 million from the guarantee commission. He also informed that up to another 2 billion will be given, with the aim of “falling” the bad loans to 5%.

“We received over 40% non-performing loans and currently it’s 8.5% and the goal is to get down to around 5% non-performing loans. We became a normal European country”, he said characteristically.