The return to the tumultuous past of Greek politics could jeopardize the path of progress

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Greece has shown a strong recovery from this severe Covid-19 crisis, which has hit the economy particularly hard given the economic dependence on tourism and travel services. Sustaining a robust recovery, however, relies on the government’s pursuit of economic and banking sector reform to raise economic growth potential, failing which a high stock of public debt could represent a continued contingent risk during downturns. tensions in world markets.

We expect the Greek economy to grow around 8.9% in 2021 before slowing to 4.3% by 2022. Pent-up domestic demand after forced savings built up during the crisis, easing of restrictions related to the pandemic in Greece and across Europe and the return of foot traffic helping service sectors, as well as the ECB’s still very accommodative monetary stance and the significant fiscal stimulus measures already in place in the system are supporting recovery. Early inflows of EU funding are also helping, with an inaugural €4 billion tranche of EU Next Generation funding released in August and more funding expected next year.

Over the medium term, we see the Greek economy growing at an above-potential rate of around 1.8% per year over the period 2023-2026, anchored by EU-funded and domestic investments in the pipeline – which, taken together, easily exceed the cumulative Greek public investments of the previous five years. Here, we must also recognize the good record of the economy in terms of absorbing EU funds.

Greece ranked second for the activation of EU cohesion funds over the multiannual budget period 2014-2020. Naturally, the recovery of the tourism services sector and after a better than expected 2021 summer season, could certainly help to give some momentum to the recovery in the coming years.

Nevertheless, Scope estimates Greece’s longer-term growth potential at a considerably more modest 1% per year, limited by an exceptionally shrinking working-age population, the latter shrinking by around 0.7% per year over the 2021-26 period, while high government surplus debt remains a longer-standing economic bottleneck – reflecting the highest government debt ratio after Japan among the 36 countries whose debt is publicly listed.

Greek public debt is expected to decline somewhat to reach 202% of GDP by the end of 2021, from an all-time high of 206.3% in 2020, supported by a strong economic rebound in 2021. continue to moderate to reach 180.9% in 2026, close to a pre-crisis ratio of 180.5% from 2019.

A sustained economic recovery remains conditional on Athens addressing remaining structural economic bottlenecks. Greece’s long-term nominal growth potential is among the weakest in the euro area, reflecting insufficient real growth as well as historically low inflation, with CPI averaging -0.2% in year-on-year over the past decade.

Improving tax compliance and reducing high spending on pensions and public sector salaries (above euro area averages) are other factors that deserve our attention, although substantial efforts have already been made to improve tax collection.

Greece’s high debt stock naturally makes the government vulnerable to a setback in international markets as the ECB scales back the emergency support introduced during the crisis since 2020. On this basis, another key to recovery rests on upcoming central bank decisions on transitioning quantitative easing policies for a post-Covid crisis phase. If the ECB communicates on the continued flexibility of asset purchases, especially in times when markets are under pressure, this could be quite crucial to ensuring the sustainability of Greek debt.

[Greece has had] a rocky seesaw after a sovereign debt crisis, the 2014-15 crisis and, more recently, Covid-19. Greece’s path is also represented by our ratings history, where we have led Greece’s upgrades from B- to BB+ for a limited period since 2017, when our agency started publishing ratings. sovereign credit. Today, Greece remains one step away from a return to an investment grade credit rating. Of course, this constructive trajectory carries significant risks and one of these uncertainties lies on the political side and what could happen after the 2023 elections.

We have outlined the factors that could support a positive credit rating action. These factors reflect, first, the fact that the Eurosystem’s support for Greek debt securities will be strengthened over the next few years even as this crisis subsides. Here it starts with the ECB defining a post-crisis monetary policy framework and whether accommodations can be introduced to support Greek debt even as the PEPP and associated credit rating rule waivers are phased out. .

We discussed in our recent Greece rating upgrade how an ECB innovation of flexible adjustment of PEPP parameters – including adaptability of program rules in introducing specific waivers to ratings regulations of credit to make Greek debt purchases possible. We expect it to prove more durable than this crisis alone with such targeted adjustments to asset purchase parameters likely to be available for reintroduction during future global crises if necessary.

Second, if fiscal consolidation and economic recovery were to result in a strong and sustained debt decline path, this encourages the ratings outlook. We are already seeing such a downward debt trajectory; however, so far, a decline in debt in 2021 has been driven more by the magnitude of a post-crisis rebound in output than by structural factors.

The question remains to what extent fiscal deficits might be corrected over the next few years, how far Greece’s fiscal policy framework might emerge after post-bailout surveillance ends, and whether a decline in public debt over the next few years will turn out to be large enough to offset the expected further increase in debt engender future crises, similar to the one experienced in 2020. Third, if structural economic and external imbalances were reduced, raising the growth potential in the medium and strengthening macroeconomic sustainability, and finally, if banking sector risks were reduced, this would improve the supply of credit to the private sector.

We underscore the importance of the continued reduction of large non-performing loans on domestic banks’ balance sheets, while acknowledging the significant progress that has been made recently. NPLs remain high – equivalent to 20.3% of total loans in June this year – but are, above all, down sharply from 40% at the end of 2019. Nevertheless, an exceptionally high level of NPLs weighs on the profitability of the banking system and the ability of Greek lenders to finance a robust recovery.

Piraeus, Alpha and the National Bank of Greece have recently taken significant steps to improve capital ratios. However, for the sector as a whole, Common Equity Tier 1 capital ratios declined slightly to 12.5% ​​of risk-weighted assets in the second quarter of 2021, from 15% in December 2020, reflecting a poor profitability and asset quality. Under an adverse scenario of the European Banking Authority’s 2021 crisis review, the Tier 1 capital ratios of three of Greece’s four systemic banks fell to 8% or less, indicating persistent vulnerabilities in the financial system.

A high share of deferred tax credits in bank balance sheets, increasing holdings of national government bonds by banks, state bank holdings as well as guarantees granted under the Hercules asset protection program also indicate a tightening of the sovereign banking link.

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