Scope Ratings AG today upgrades the Hellenic Republic's long-term foreign- and local-currency issuer ratings from CC to B-, following the release of its revised sovereign rating methodology, and converts its status from subscription to public. The agency also assigns a long-term foreign-currency issuer rating of B-, along with a short-term issuer rating of S-4 in both local and foreign currency. The sovereign’s senior unsecured debt in both local and foreign currency was also rated at B-. All Outlooks are Stable.

Rating drivers

The rating is underpinned by Hellenic Republic’s euro area membership and its observance of the EU economic governance framework. These aspects support credible macroeconomic policies and provide access to financial facilities from European institutions, thus increasing the sovereigns’ ability to withstand economic and financial shocks. Scope views these developments, together with the new macroeconomic surveillance, as being decisive steps towards a more robust euro area architecture, better protecting it from an adverse shock and underpinning sovereign creditworthiness in the region.

Improvements in the ‘domestic economic risk’ and ‘public finance risk’ categories of Scope´s analysis drive the rating upgrade. The upgrade reflects the following three rating drivers: (1) Greece’s broad compliance with the third adjustment programme, releasing funds to meet its July debt maturities; (2) Greece’s improving budgetary performance with fiscal results exceeding targets; (3) Greece’s stabilising macroeconomic indicators, underpinned by structural adjustments.

The positive conclusion of Greece’s second review of the country’s adjustment programme will lead to the release of EUR 8.5bn tranche enabling the Greek government to repay upcoming maturities of EUR 6.6bn, cover arrears and possibly give room to start building a cash buffer. The latest tranche agreed at the Eurogroup meeting on 15th June, reflects the acknowledgement of lenders, including the IMF, that Greece has implemented a number of challenging measures, including further tax increases and pension cuts, changes to labour market laws and banking sector reforms. While these measures are politically challenging, cross parliamentary party support indicates broad political support in favour of continued euro area membership.

Greece has exceeded fiscal results for 2016 as well as the targets set under the current EUR 86bn European Stability Mechanism (ESM) adjustment programme, scheduled to end in August 2018. Greece reported a primary surplus of 3.9% of GDP in 2016 (against a target of 0.5% of GDP), higher than the 3.5% target for 2018. The improvement was also driven by better-than-expected revenue growth. This is an additional credit positive development, as previous fiscal consolidation measures were focused on one-off discretionary spending cuts which would be difficult to maintain, given the relatively narrow tax base. In Scope’s view, higher revenue growth is also the result of improved tax collection rates, the continuation of capital controls and the partial clearance of state arrears, which have increased private-sector liquidity as well as indirect tax receipts and corporate income tax.

Greece’s macroeconomic situation is starting to stabilize, underpinned by structural adjustments. Visible signs of economic stabilization and gradually improving prospects lead to lower economic risks. Greece’s GDP remained almost unchanged in 2016, with a relatively volatile quarterly GDP growth. Scope expects real GDP to grow by around 2% in 2017 and 2018, driven cyclically by private consumption, albeit contingent on the programme’s ongoing success and declining unemployment. Investment is set to accelerate, subject to further reform progress and the easing of capital controls.

Financing conditions in the economy remain challenging, due to continuing, though easing capital controls. Bank liquidity is progressively normalizing, with a slow but continuous decrease of the Emergency Liquidity Assistance. The recovery of Greek banks continues to be burdened by weak asset quality in the banking sector (non-performing loans comprised 36.3% of total loans at the end of 2016, the largest percentage in the EU), whose own solvency remains closely related to the sovereign.

Greek interest payments, relative to revenues, are low due to the predominantly concessional nature of the country’s public debt. The debt profile is relatively robust, with a very long weighted average residual maturity of 16.6 years and a low cost of debt outstanding, which makes debt service requirements relatively affordable despite the high debt stock. Therefore, Scope believes that focusing purely on the fact that public-debt stock is high relative to GDP (181.3% in 2016) somewhat overstates public finance risks.

The disagreements among the European creditors and the IMF have arisen from their conflicting assessments of Hellenic Republic’s public-debt sustainability in the long term, notably regarding projections of GDP growth and primary surpluses. Both analyses point to some concerns regarding the sustainability of public debt over the long term, i.e. after the year 2030. Scope assesses Hellenic Republic’s public-debt dynamics as weak. The official loans at very low interest rates are giving Hellenic Republic fiscal breathing room to improve its public finances. The improving but relatively weak GDP growth outlook makes public-debt dynamics vulnerable in the long term, particularly once market debt replaces official loans. In this regard, Scope notes that Greece has already benefited from debt re-profiling of European official loans’ repayment terms, in the form of reduced interest costs, lengthened maturities and grace periods. Regarding further debt relief measures, the Eurogroup has agreed to a contingency mechanism to ensure long-run debt sustainability if a more adverse economic scenario materialises. Further debt relief measures, as indicated by official creditors, would materially improve the long-term sustainability of Greek public-debt dynamics, increase confidence, and thus strengthen Hellenic Republic’s ability to handle its debt burden.

Sovereign rating scorecard (CVS) and qualitative scorecard (QS)

Scope’s Core Variable Scorecard (CVS), which is based on the relative rankings of key sovereign credit fundamentals, signals an indicative (bbb) range for the Republic of Greece. This indicative rating range can be adjusted by the Qualitative Scorecard (QS) by up to three notches, depending on the size of relative credit strengths or weaknesses versus peers based on analysts’ qualitative analysis.

Greece’s credit metrics captured by the CVS result are heavily influenced by the successive assistance programmes that the country has entered since 2010 that cannot be captured by the CVS Scorecard. For Greece, relative credit weaknesses are signaled for 1) growth potential, 2) economic policy framework, 3) macroeconomic stability and imbalances, 4) fiscal performance, 5) public debt sustainability, 6) market access and funding sources, 7) recent events and policy decisions, 8) perceived willingness to pay, 9) financial sector performance, 10) macro-financial vulnerabilities and fragility.

An overall negative adjustment was made to the CVS outcome to B- to incorporate Greece’s experience as a financial crisis country. As a result, the rating committee implemented a greater adjustment beyond the usual +/- 3 notch to account for the following factors. These are: (i) Greece’s recent history of default, (ii) the ongoing persistence of banking sector challenges and decreased confidence due to capital controls, (iii) the ineligibility of Greek government securities for the ECB’s purchase programme, (iv) official creditors’ disagreement regarding measures to ensure long-term solvency, and (v) uncertainties beyond 2018, when the current programme is planned to expire.

The results have been discussed and confirmed by a rating committee.

For further details, please see Appendix 2 in the rating report.

Outlook and rating-change drivers

The Stable outlook reflects Scope’s assessment that the country’s continuing compliance with the adjustment programme reduces banking sector liquidity pressures, supporting the stabilisation of the economy.

The ratings could be upgraded if: (i) debt relief measures were applied by official creditors, basically ensuring more robust public-debt dynamics in the long run, (ii) Greek government became eligible for the ECB’s quantitative easing programme, broadening the country’s access to bond markets; (iii) capital controls were eliminated and banking sector risks were to be eased, (iv) GDP growth proved to be more balanced and sustained than expected. Conversely, the ratings could be downgraded if: (i) relationship between Greece and its creditors were to become more strained; (ii) fiscal consolidation and reform progress were to be reversed due to policy reversals; (iii) growth prospects strongly weakened; and (iv) banking sector risks intensified and/or the envisaged tackling of the high non-performing-loans failed.

For the detailed research report please click HERE.

Rating committee

The main points discussed during the rating committee were: (1) country’s adjustment programme progress, (2) sustainability of the economic recovery, (2) public finance and current account balance developments, (3) debt sustainability analysis, (4) recent political and institutional developments, (5) structural reforms agenda, (6) peers consideration.

Methodology

The methodology applicable for this rating and/or rating outlook “Public Finance Sovereign Ratings” is available on www.scoperatings.com.

Historical default rates of Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/governance-and-policies/regulatory/esma-registration. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default, definitions of rating notations can be found in Scope’s public Credit Rating methodologies on www.scoperatings.com.

The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.

Regulatory disclosures

This credit rating and/or rating outlook is issued by Scope Ratings AG.
Rating prepared by Jakob Suwalski, Lead Analyst
Person responsible for approval of the rating Dr Stefan Bund, Chief Analytical Officer
The ratings /outlook was first assigned by Scope as subscription rating on January 2003. The subscription ratings/outlooks were last updated on 05.05.2017.
The senior unsecured debt ratings as well as the short term issuer ratings were assigned by Scope for the first time.
As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on Hellenic Republic are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Sovereign Ratings Calendar of 2017" published on 30.06.2017 on www.scoperatings .com). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case the deviation was due to the recent revision of Scope’s Sovereign Rating Methodology and the subsequent putting the ratings under review, in order to conclude the review and disclose these ratings in a timely manner, as required by the Article 10(1) of the CRA Regulation¹.

¹Editor's note: The above paragraph was corrected on 17 July 2017 following the publication of the credit rating action on 30 June 2017. The original wording was: Deviation of the publication of sovereign ratings or related rating outlooks from the calendar shall only be possible where necessary for the credit rating agency to comply with its obligations under Article 8(2), Article 10(1) and Article 11(1) and shall be accompanied by a detailed explanation of the reasons for the deviation from the announced calendar. It was replaced with the following: As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on Hellenic Republic are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Sovereign Ratings Calendar of 2017" published on 30.06.2017 on www.scoperatings .com). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case the deviation was due to the recent revision of Scope’s Sovereign Rating Methodology and the subsequent putting the ratings under review, in order to conclude the review and disclose these ratings in a timely manner, as required by the Article 10(1) of the CRA Regulation.

Solicitation, key sources and quality of information
The rating was initiated by Scope and was not requested by the rated entity or its agents. The rated entity and/or its agents did not participate in the ratings process. Scope had no access to accounts, management and/or other relevant internal documents for the rated entity or related third party.
The following material sources of information were used to prepare the credit rating: public domain and third parties. Key sources of information for the rating include: the European Commission, the IMF, the World Bank, Bank of Greece, PDMA, Eurostat, ECB, Ministry of Finance, and Haver Analytics.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to publication, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds upon which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Conditions of use / exclusion of liability
© 2017 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings AG, Scope Analysis, Scope Investor Services GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope cannot, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided “as is” without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or otherwise damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party, as opinions on relative credit risk and not as a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings AG at Lennéstraße 5 D-10785 Berlin.

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