Rating action

Scope Ratings GmbH (Scope) has today upgraded the Hellenic Republic (Greece)’s long-term issuer and senior unsecured debt-category ratings to BBB from BBB- in local- and foreign-currency and revised the Outlooks to Stable, from Positive. The short-term issuer ratings have been affirmed at S-2 in local- and foreign-currency, with the Outlooks remaining Stable.

Rating rationale

The upgrade to BBB reflects Scope’s expectation of a continued reduction in Greece’s general government debt ratio during the forthcoming years. This decline is seen being driven by favourable debt dynamics, alongside stronger-than-anticipated primary fiscal surpluses and an associated further narrowing of the headline budget deficit. The resilience of the banking system is reinforced by progress in reduction of non-performing loans (NPLs), privatisations of systemic banks and the gradual amortisation of deferred tax credits (DTCs) on bank balance sheets. In addition, the adoption of structural reforms and investments, reduction of macroeconomic imbalances and more-durable support from European institutions bolster macroeconomic sustainability and trend growth.

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Key rating drivers

The continued decline of government debt and strong fiscal performance. The first driver of the one-notch upgrade of Greece’s long-term ratings to BBB reflects the sustained reduction in Greece’s public debt. This is primarily driven by favourable public-debt dynamics as supported by a strengthened medium-run nominal-growth outlook, still-low average interest costs of the outstanding debt, and a government commitment to budgetary prudence.

The general government debt ratio has declined significantly from its pandemic-crisis peaks of 212.6% of GDP as of 2020, reaching an estimated 155.3% by the end of 2024, representing a meaningful 57pp reduction and falling already under the pre-pandemic levels of 185.5% from end-2019. The robust economic recovery since Q2-2020 alongside elevated inflation recently and reduced fiscal deficits have driven a marked decline of public debt and the drivers appear sustainable enough as to maintain continued debt declines even if at a gradually moderating pace.

The debt ratio is forecast to ease to 145.0% of GDP by the end of 2025, before easing further to 132.0% by end-2029. If realised, the latter might represent Greece’s lowest debt ratio since the beginning of the Greek crisis in Q1 2010. The agency’s debt projections for Greece have strengthened due to continued budgetary out-performance, as the government is anticipated to exceed a 2024 primary-surplus estimate from Budget 2025 of 2.4% of GDP. Scope has updated medium-run primary-balance assumptions and expects the government to average 2.75% of GDP primary budget surpluses during 2024-27 over the remainder of the Kyriakos Mitsotakis government, an increase from an earlier assumption as of July 2024 of 2.4-2.5% surpluses during the same years.

The continued focus on budgetary prudence provides Scope with an increased confidence in the ability of government to achieve and sustain elevated primary-surplus objectives ahead of the next general elections barring unforeseen crises. This is despite the reduced conditionality and increased policy making sovereignty after Greece exited from the economic adjustment programmes and post-bailout enhanced surveillance. Primary surpluses align with more-moderate headline fiscal deficits averaging a forecast 0.7% of GDP over 2024-29.

Scope’s debt projections assume output growth of 2.2% for this year, 2.2% next and 1.6% on average from 2026 to 2029. The medium-run projection is nevertheless comparatively optimistic, currently reflecting no recession to 2029. In addition, Scope assumes GDP-deflator inflation of 2.5% during 2024-29, a significant assumption compared against a deflationary -0.4% average of 2012-21.

Downside risks for the agency’s baseline economic scenario include: i) a sharp economic downturn; ii) an unexpected return to lower inflation; iii) a sharp rise in borrowing rates; and/or iv) a material weakening of the budgetary position. As an example, under a stressed economic scenario of two consecutive years of recession during 2025-26, Greek debt might reach 169% of GDP by 2026.

Improvements in banking-system resilience. The second driver of the ratings upgrade is the ongoing enhancement of banking-system stability and reduced sovereign-bank links.

Greek banks have made considerable progress concerning their NPL reductions. System-wide NPLs on a consolidated basis declined significantly from 49.2% as of June 2017 – reaching 6.4% by June 2024¹. This reduction has been supported by NPL securitisations as guaranteed under the Hercules Asset Protection Scheme (HAPS) – which has been re-introduced last December to cut NPLs at the less-significant Greek banks and runs until the end of this month. Scope expects the NPL ratio to continue declining as banks remain committed to furthering balance sheet clean-up. Nevertheless, NPLs remain at this stage above the EU averages of 1.9% as of Q2 2024, and moreover remain in the system even if not reported by the official statistics.

Profitability has improved since the end of 2021 on the back of increased interest incomes benefitting from currently higher lending rates, the declining loan loss provisioning and increased non-recurrent incomes from financial operations and hedging instruments. System-wide tier 1 capital is strengthening from retained earnings and asset de-risking. As of Q2 2024, it amounted to 16.2% of risk-weighted assets, as compared against 13.0% at 2021 lows.

Despite the significant reductions of NPLs, pressures on banking-system balance sheets continue from the elevated shares of DTCs within aggregate banking-system capital (accounting for 41% of total prudential own funds as of June 2024), nevertheless declining from the 52% as of end-2022. Amortisations of DTCs are foreseen by the Bank of Greece being potentially accelerated to fully amortise by 2032-34 barring extenuating circumstances. The ECB approved the payment of banking-system dividends for the first time in 15 years, representing a milestone.

The Hellenic Financial Stability Fund (HFSF) recently completed the sale of 10pps of a 18.4% holding in the National Bank of Greece (NBG) by a marketed share offering. HFSF expects to transfer a final 8.4% share in NBG and 72.5% of the smaller Attica Bank to the sovereign wealth fund before closing down by the end of this year (ahead of a deadline by the end of 2025)². The HFSF sold its final 8.9781% stake in Alpha Services and Holdings to UniCredit in November of last year and sold the final 27% stake in Piraeus Bank this spring.

In addition, other aspects of the sovereign-bank inter-linkages such as banks’ domestic government bond holdings are being partially addressed. HAPS is not seen being further extended from end-2024, so guarantees will gradually draw down moving ahead. The referenced actions curtail the legacy of the Greek crisis and cut stepwise sovereign-bank interlinkages – supporting a one-notch rating upgrade at this intermediate stage.

Enhanced macroeconomic stability and higher medium-run trend growth. The final driver of the rating change is enhanced macroeconomic stability following the crises of the past 15 years, alongside sustained structural reforms and investment, which have supported the economic outlook.

Progress has been sustained on the reforms and investments of “Greece 2.0”, the Greek Recovery and Resilience Plan (RRP) and the EU Cohesion Policy. On 16 October of this year³, the European Commission disbursed the fourth payment of EUR 998.6m in grant monies from Greece’s EUR 35.9bn Recovery and Resilience Plan – composed of EUR 18.2bn on the aggregate in grants and EUR 17.7bn in loans. A total of 51% of RRP funding has been paid out to date. Investment in the Greek economy remains low – 14% of output as of the year to Q2 2024 – but this is nevertheless stronger than the below 11% as of 2019.

The rating agency has modestly increased its estimate of Greece’s economic growth potential to 1.25% a year from 1.0%, still recognising the modern economic history of Greece – with growth having averaged just -0.4% during the past two decades – alongside demographic bottlenecks such as -0.9% a year working-age population changes forecast by the United Nations during 2024-29. Stronger nominal economic growth is anticipated over the forthcoming years – partially given harmonised inflation of an elevated 3.0% for this year, 3.4% in 2025 and 2.5% for 2026, after 4.2% last year.

The still-elevated unemployment has edged lower (to 9.8% as of October this year – from June 2020 peaks of 20.4%) although this remains well above the EU averages of 5.9% as of October 2024. Scope assumes Greek unemployment easing to 10.1% on average this year before 9.5% for 2025 and 9.0% in 2026, from 11.1% last year, on the back of continued above-trend economic growth.

Rating challenges: elevated government debt and the gradual weakening of a strong structure of government debt; structural economic weaknesses.

Greece’s BBB credit ratings are constrained by:

Firstly, Greece’s government debt remains among the highest of Scope’s publicly-rated universe of 40 sovereigns, second only to that of Japan (rated A and Stable Outlook). This high stock of debt exposes Greece to market reappraisals of risk associated with indebted sovereign borrowers. As Greece increasingly relies on the capital markets and accelerates the early repayment of bailout loans and the ECB quantitatively tightens, the structure of Greek debt gradually weakens. Interest payments are increasing gradually – as Greek refinances by higher interest cost market issuance. The very-long weighted-average debt maturity (of 18.9 years)⁴ – the lengthiest of the agency’s rated sovereign universe – is gradually normalising lower as the government targets an average maturity of 10 years within ten years. Finally, as sovereign ratings are assigned on the debt due to be repaid to the private sector, the increasing share of debt held on the private-sector balance sheet is a moderate credit concern.

Political and policy-related risks are moderate over the forthcoming years but may rise longer run especially following future elections. Structural economic weaknesses and demographic challenges, such as net emigration, restrict longer-run trend growth and wealth levels. The elevated structural unemployment and still-moderate labour-force participation rates are credit constraints, even if the unemployment rate is declining. The GDP per capita of USD 42,066 on purchasing-power-parity bases as of this year remains below the averages of the European Union (USD 62,660). Moreover, the low disposable incomes of households compared against final consumption represent a social constraint, even as the comparative prevalence of low-income jobs and of small and medium-sized enterprises weigh on productivity and the tax base, and enhance poverty and social exclusion among vulnerable groups. Greece’s external sector is a challenge with significant structural current-account deficits reflecting persistent vulnerabilities. Finally, environmental challenges pose a further risk to Greece’s economic and budgetary outlooks if left unattended to given the economy’s dependence on tourism and agriculture sectors.

Rating-change drivers

The Stable Outlook reflects Scope’s opinion that risks for the ratings are balanced over the forthcoming 12 to 18 months.

The upside scenarios for the long-term ratings and/or Outlooks are if (individually or collectively):

1. Nominal economic growth and fiscal consolidation result in strong and sustained reductions in the general government debt ratio while controlling the weakening of the government debt structure;
    
2. Structural-economic and external imbalances are reduced, further elevating medium-run growth potential and strengthening macroeconomic sustainability; and/or
    
3. Banking-sector risks are further reduced, via the strengthening of banking-system capitalisation, lowering of non-performing private debt and/or further curtailing of sovereign-bank links.

Conversely, the downside scenarios for the long-term ratings and/or Outlooks are if (individually or collectively):

1. The public debt trajectory reverses or the debt structure of Greek debt weakens meaningfully;
    
2. Banking-sector risks re-intensify, increasing contingent liabilities that might affect the sovereign balance sheet;
    
3. Macroeconomic growth weakens and/or external-sector imbalances rise; and/or
    
4. The Eurosystem support for Greek debt is curtailed significantly or market concerns around indebted sovereigns trigger the deterioration of borrowing conditions.

Sovereign Quantitative Model (SQM) and Qualitative Scorecard (QS)

Scope’s Sovereign Quantitative Model (SQM) provides a first indicative credit rating of ‘bbb-’ for Greece. This ‘bbb-’ first indicative rating receives a further one-notch uplift from the SQM’s reserve-currency adjustment and no negative adjustment from the political-risk adjustment. This sees a final SQM indicative credit rating of ‘bbb’ on Greece. On this basis, this final SQM quantitative rating of ‘bbb’ is reviewed by the methodology’s Qualitative Scorecard (QS) and can be changed by up to three notches by the primary analyst depending on the size of Greece’s qualitative credit strengths or weaknesses compared against a sovereign peer group as identified by the SQM.

Scope identified the following QS relative credit strengths for Greece against the credit’s sovereign peers: i) Fiscal policy framework; ii) Debt profile and market access; iii) External debt structure; iv) Financial sector oversight and governance; and v) Governance factors. Conversely, the following qualitative relative credit weaknesses of Greece against its sovereign peers have been identified by the QS: i) Growth potential and outlook; ii) Macro-economic stability & sustainability; iii) Current account resilience; iv) Environmental factors; and v) Social factors. On the aggregate, the QS generates no net adjustment affecting Greece’s credit ratings, seeing final BBB long-term credit ratings. A rating committee has discussed and confirmed these results.

Environment, social and governance (ESG) factors

Scope explicitly factors in ESG issues within its ratings process via the sovereign-rating methodology’s stand-alone ESG sovereign-risk pillar, which holds a significant 25% weighting under the quantitative model (SQM) and 20% weight under the methodology’s qualitative overlay (QS).

In the sovereign ESG pillar’s environmental risk sub-category, Greece scores moderately strongly on the SQM on the economy’s carbon emissions per unit of GDP but, like other advanced economies, comparatively weakly on greenhouse gas emissions per capita. Greece’s vulnerabilities to natural-disaster risks, as measured by the ND-GAIN Index, is higher than that of other euro-area societies although slightly below-median on a global comparison. Greece’s marks are, moreover, weak on the SQM on the economy’s comparatively high ecological footprint of consumption compared against the available biocapacity. On the aggregate, Greece performs about at the global median on the environmental ESG sub-category of the SQM but nevertheless sixth worst of the euro area. Droughts and wildfires are becoming more frequent and intense. A separate Ministry of Climate Crisis and Civil Protection was designed following the wildfires of 2021, but adaptation has been hampered by the required preparations at regional administrations. Greece experiences the most significant climate-related economic losses of any EU nation, according to Eurostat.⁵ Greece holds an ambitious climate policy vis-à-vis the revised National Energy and Climate Plan⁶, aiming for 23% reductions from 2005 greenhouse gas emissions levels by year 2030 (under the Effort Sharing Regulation), before a zero-carbon economy by 2050, alongside the penetration of renewable energy sources for 44% of energy consumption by the end of this decade. Alongside via the SQM, Greece’s environmental objectives and moves towards more sustainable output growth are furthermore considered by Scope by an analytical assessment of ‘weak’ on the ‘environmental factors’ QS sub-category as compared against the sovereign’s peer group.

Socially related credit factors are likewise captured by both Scope’s SQM and the QS qualitative overlay. On the quantitative model, Greece receives comparatively strong scores on income inequality (as captured by the income shares of the bottom 50% of the population), moderate marks on labour-force participation, and weak scores on the old-age dependency ratio. In the QS assessment of Greece’s ‘social factors’, Scope continues to evaluate this qualitative analytical sub-category as ‘weak’ as compared against the credit’s ‘bbb’ sovereign peers.

Finally, under governance-related factors included within the SQM, Greece displays scores near the global median on the World Bank’s Worldwide Governance Indicators (WGIs). Despite lagging peers within the euro area on governance, the Greek reform agenda since 2017 has resulted in some improvements on WGIs scoring. Ongoing reforms have anchored an improvement of institutional strengths and have brought progress on areas such as tax administration and compliance, the judicial system, public administration, and anti-corruption. Since 2019 elections, Greece has experienced comparative political stability, due to an absolute parliamentary majority held since then by New Democracy. In the QS assessment of Greece’s ‘governance factors’, Scope evaluates this qualitative analytical sub-category as ‘strong’ against Greece’s ‘bbb’ sovereign peer group.

Rating committee
The main points discussed by the rating committee were: i) conclusions from meetings with the issuer; ii) debt and budgetary outlook; iii) early official-loan repayments, debt structure and cash balance; iv) banking system; v) structural reforms and growth potential; vi) external sector; vii) SQM and Qualitative Scorecard; and viii) sovereign peers considerations.

Rating driver references
1. Bank of Greece: Evolution of loans and non-performing loans
2. Reuters: 20 March 2024
3. Greece 2.0: National Recovery and Resilience Plan
4. Public Debt Management Agency (Greece): Weighted Average Maturity
5. Eurostat: Losses from climate change: €145 billion in a decade
6. Hellenic Republic Ministry of the Environment and Energy: National Energy and Climate Plan, October 2023

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Sovereign Rating Methodology, 29 January 2024), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and/or Outlooks is (Sovereign Quantitative Model Version 4.0), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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 Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain and the Rated Entity.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Dennis Shen, Senior Director
Person responsible for approval of the Credit Ratings: Giacomo Barisone, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings in January 2003. The Credit Ratings/Outlooks were last updated on 12 July 2024.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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